The Future of the IMF Depends on ‘Legalization’ Of the Shareholder States’ Political Support
The gathering pace of globalization, especially of financial markets; the transition of many countries from planned to market economies; and the long-standing plight of impoverished peoples all offer never-ending challenges. What is the International Monetary Fund’s role in confronting them? For 13 years I was privileged to lead an IMF whose strengths include fostering economic cooperation and providing advice and assistance to 182 countries as varied as the United States and the smallest Pacific island nation. The IMF does this on the basis of a clear, tried, and tested mandate that is as relevant today as when the IMF was created over half a century ago.
Adaptability to change has always been a hallmark of the fund. The IMF’s focus remains on macroeconomic policies that foster sustainable growth. But in response to the need demonstrated by recent financial crises, the fund now places stronger emphasis on developing sound financial systems, and on good governance and transparency.
Yet crisis management remains our best known activity. This encompasses both headline-grabbing situations of imminent economic collapse, as well as less visible help to countries struggling to attain external viability and growth, or to countries seeking help before problems become a crisis. As a self-reforming institution, the IMF reviews constantly both the kinds of advice and loans it offers to support these countries. But when it comes to crisis prevention is better than cure. So we are modernizing our loans to serve our entire membership better and to avoid crises spreading.
Central to international monetary stability is a question of exchange rate regimes. A lively debate is now in progress, including over the euro’s role once it reaches its full potential as a major reserve currency. Related to this, and clearly a result of recent crises in Asia and other emerging markets is a broad effort to reform the architecture of the entire international financial system, an effort that must continue despite today’s rosier global economic outlook. Here the IMF retains a key role in several areas.
Creating the right conditions for global financial flows is vital. Thus the fund promotes full and orderly liberalization of capital movements, including by making changes to our Articles of Agreement. To avoid disorder, the fund could be allowed to facilitate a stay of legal action by creditors in the most severe debt crises.
As hard as the IMF works to sustain economic growth and financial stability, systemic crises are still likely to occur. This raises the issue of the need for an international lender of last resort to provide liquidity in the event of a global credit crunch. Although the IMF is the closest that the international financial system has to such a lender, in the crises of 1997-98 its resources were stretched to the breaking point.
What might happen in a truly systemic global crisis. The IMF, like a central bank at the national level, could be authorized to use its own international reserve asset, Special Drawing Rights, or SDRs. It could inject international liquidity through the creation and allocation of SDRs, and withdraw them when the crisis abated.
An added systemic threat looms: that posed by poverty. In cooperation with the World Bank and member governments, the IMF established its Initiative for Heavily Indebted Poor Countries (HIPC) to provide large- scale debt relief to the poorest nations. The IMF has also introduced a new form of concessional lending, the Poverty Reduction and Growth Facility to bring international agencies together with governments and civil society in poor countries to devise policies to stimulate growth and reduce poverty.
One common element in all the issues is the need to find a global response to global problems. Ours is the first generation capable of influencing global affairs through voluntary international cooperation, without employing military or imperial power. But to achieve this goal unprecedented coherence in economic decision-making and political responsibility is required.
The risks of not grasping this opportunity are illustrated by the failure to launch the next round of trade negotiations at the World Trade Organization meeting in Seattle. The industrial countries could not even take the small step of eliminating trade barriers to the exports of the poorest and most heavily indebted countries. That failure threatens to make a mockery of decisions by these same governments to write down the debt of the HIPC countries. Forgiving debt is not enough; the poorest countries must be able to export, grow, and reduce poverty.
As I leave the IMF, one regret is that we have not made more progress in securing support for institutional changes needed to promote the better exercise and perception of the political accountability at the IMF. Creation of the International Monetary and Financial Committee, the ministerial body that meets for the first time in April 2000 is a step in the right direction, but the world deserves better.
Instead of a purely advisory committee, the full-blown Council enshrined in the IMF’s articles 25 years ago should be established. Here is a way for the IMF to secure, visibly, the legitimate political support of our shareholders. Another suggestion consists of replacing the G7 Summit every two years by a meeting of the heads of state and government of the approximately 30 countries that have Executive Directors on the boards either of the IMF or World Bank.
Collective decisions made under the aegis of international financial institutions must have public legitimacy. It is essential to understand the central role the IMF plays in defining the path taken so far in the search for greater prosperity and stability. The world must not lose sight of this as it strives to adapt global rules of the road and the institutions that oversee them.
INCIDENTALLY
The IMF mission led by Mohammad Shadman Valavi worked in Ukraine last week. The Ukrainian side insisted on continuing the dialogue to renew EFF and restructure its public debt (the previous IMF mission visiting Kyiv in mid-January declined to submit positive findings to the IMF Board of Directors). This time, First Deputy Premier Yuri Yekhanurov told journalists that he hopes the Board will consider the renewal of the EFF early this March. With Ukraine’s commitment to pay some $3.2 billion this year alone, Kyiv is extremely interested in the positive outcome of the dialogue with its strategic partner, the IMF. Otherwise Ukraine will have to forswear EFF, credit lines from other international financial institutions, and restructured debts payable to a number of foreign creditors. While Viktor Yushchenko is flying from London to Kyiv, the First Deputy Premier is prepared to take the IMF mission in hand and have a serious talk with Mr. Valavi about Western journalists’ taking unjustifiable (and apparently not accidental) liberties, particularly in the case of The Financial Times and its several articles incriminating the National Bank of Ukraine. Mr. Yekhanurov stressed that these accusations are “totally ungrounded.” Moreover, he declared that the IMF mission in Kyiv will consider the possibility of recommending the Board resume EFF tranches to Ukraine before the end of the NBU’s audit being carried out by Price Warehouse Coopers in the aftermath of the Financial Times scandalous publications (the audit may take several months).
Meanwhile IMF managing director Michel Camdessus resigned his post as of February 14, followed by a worldwide discussion of his possible successor. In a farewell gesture, Mr. Camdessus offered his view of IMF’s role in the world economy. Ukraine will without doubt find it very interesting, because for better or for worse relations with IMF have become a key component of Ukraine’s macroeconomic prospects and domestic political situation.
