IMF moves towards a multilateral approach

It looks like the world’s most powerful financial institution could be about to undergo substantial reform. At the International Monetary Fund’s recent spring meeting there was a broad consensus that the organisation needs to be brought into line with contemporary realities. These include the emergence of large international economic imbal- ances and the rise of Asia as a substantial economic bloc.

One of the key focuses for reform is what is known as “multilateral surveillance”. So rather than concentrate on individual countries, as it does at the moment, the IMF will also look at relationships between countries. These will include, in the words of the meeting’s communiqu窠”spillovers from one economy on others“.*

Such a framework is considered particularly important in a world of substantial economic imbalances. Most notably, America has an unprecedented current account deficit, while East Asia has a corresponding surplus. The multilateral surveillance framework could provide a way of helping to resolve such imbalances without global instability.

Another key change is to give the Asian countries a greater say in the IMF. When the organisation was conceived in 1944 (see below) the pre-eminent economic powers in the world were in America and Europe. But in recent years, Asia, in particular, has also come to play a key role. Yet the established powers still control the institution with by far the greatest voting rights and the managing director, by convention, always being a European. As part of the same deal, the head of the World Bank, the IMF’s sister institution, is always an American.

There is now a consensus that the balance has to shift more towards Asia. Indeed, such a change is necessary for the key Asian countries to accept the multilateral surveillance framework.

As Gordon Brown, chairman of the IMF’s international monetary and financial committee as well as Britain’s Chancellor, noted in a press briefing: “We also agreed that changing times, voice, votes and quotas should reflect the changing international economic weight of countries in the global economy.”

This consensus has emerged since Rodrigo de Rato, formerly Spain’s economy minister, launched a strategic review after becoming the IMF’s managing director in June 2004. A first report on the issue was published in September 2005, while a new report was discussed at the recent spring meeting.

Influential outsiders have also supported the move to institutional reform. For example, in February the governor of the Bank of England, Mervyn King, gave a speech calling for IMF reform.**

He said: “The fund’s remit is unclear. Its lending activities have waned and its role in the international monetary system is obscure.”

Similar calls for reform were made by Edwin Truman, a senior fellow at Washington’s influential Institute for International Economics.

Despite the broad agreement on reform, it is not clear how thoroughgoing the changes will be in practice. While there is recognition that the IMF’s use is limited in its present role, there are also vested interests against change.

For example, the Europeans are unlikely to be happy with the substantial reduction in their voting rights that a greater Asian role would entail. Neither are they likely to welcome an IMF head chosen solely on merit rather than partly on his nationality.

It is also hard to see America conceding to IMF pressure to cut its current account deficit or restructure its economy in other ways. It is one thing for poor countries to acquiesce to the IMF when they are desperate for funds. But it is hard to see the IMF having the muscle to make America The International Monetary Fund was conceived at a conference of 45 nations in Bretton Woods, New Hampshire, in July 1944. Its stated aims included promoting international monetary cooperation, facilitating the expansion of international trade and promoting exchange rate stability.

In its early years, the IMF operated in the context of fixed exchange rates. Currencies were pegged to the dollar, which was in turn exchangeable for gold. Under this system, the IMF was the international lender of last resort.

But this system broke down in the early 1970s after the American authorities, under pressure from high inflation, suspended the convertibility of the dollar to gold. A system of floating exchange rates began.

From the 1980s onwards, the IMF has focused largely on the developing world. In the 1980s, much attention was given to the Latin American debt crisis. The organisation increasingly lent money, and negotiated support packages, for countries in financial difficulty.

In response to the Asian financial crisis of 1997-8, the organisation developed a “new financial architecture” to help it operate in a world of huge capital flows. Key elements of this new approach included standards and codes of good practice for countries to follow. In the early years of this decade, the IMF gave substantial support to Argentina, Brazil and Turkey.

The fund now has 184 member countries. It has about 2,700 staff and $34bn (19bn) of loans outstanding to 75 countries.accept its demands.

Perversely, part of the problem may be that the world is not in the midst of an economic crisis. Painful as such experiences can be, they often spur institutional reform. Without them there is no urgent impetus for change, even if the desirability of reform is recognised in principle.

The extent of progress with reform should become clearer in September when the IMF has its annual meeting in Singapore. There is a chance that significant changes will be made, but the strong possibility remains that vested interests could block substantial reforms.

*Communiqu矯f the International Monetary and Financial Committee of the Board of Governors of the International Monetary Fund. April 22, 2006. Available at www.imf.org.
**Reform of the International Monetary Fund. February 20, 2006. Available at www.bankofengland.co.uk.


History of the International Monetary Fund
The International Monetary Fund was conceived at a conference of 45 nations in Bretton Woods, New Hampshire, in July 1944. Its stated aims included promoting international monetary cooperation, facilitating the expansion of international trade and promoting exchange rate stability.

In its early years, the IMF operated in the context of fixed exchange rates. Currencies were pegged to the dollar, which was in turn exchangeable for gold. Under this system, the IMF was the international lender of last resort.

But this system broke down in the early 1970s after the American authorities, under pressure from high inflation, suspended the convertibility of the dollar to gold. A system of floating exchange rates began.

From the 1980s onwards, the IMF has focused largely on the developing world. In the 1980s, much attention was given to the Latin American debt crisis. The organisation increasingly lent money, and negotiated support packages, for countries in financial difficulty.

In response to the Asian financial crisis of 1997-8, the organisation developed a new financial architecture to help it operate in a world of huge capital flows. Key elements of this new approach included standards and codes of good practice for countries to follow. In the early years of this decade, the IMF gave substantial support to Argentina, Brazil and Turkey.

The fund now has 184 member countries. It has about 2,700 staff and $34bn (19bn) of loans outstanding to 75 countries.