Financial Times - December 10, 1999
IMF: Pruning the Fund
The US wants the Fund to concentrate on fighting financial crises - but can the first and third worlds agree on who should lead it, asks Stephen Fidler
The future role of the International Monetary Fund in the global financial system is now in play. At issue is whether Washington will be able to use its 18 per cent shareholding in the IMF to continue (as it often has since its inception more than half a century ago) to use the Fund as an extension of US foreign policy.
The question has been sharpened by last week's debacle at the World Trade Organisation meeting in Seattle where the US and Europe clashed with developing countries that now want to have a bigger say in the international economic order. Some observers believe the IMF and the World Bank are the next natural battleground.
On the fringes of their summit in Helsinki today, European leaders are expected to discuss who should be the next IMF head. In Washington, meanwhile, plans are being hatched for what is billed as important reform of the agency. The two discussions are closely entwined.
Washington's proposals are to be described in detail in Europe next week by Lawrence Summers, the US Treasury secretary, either in London, or at the first meeting - in Berlin - of the newly formed Group of 20, comprising governments viewed as important actors in the world financial system.
Mr Summers is expected to suggest turning off the drip-feed of IMF credit on which some developing economies have come to depend and focusing the agency on its role of preventing and dealing with financial crises.
The timing of the initiative is significant. It coincides with the search for a new managing director of the Fund to replace Michel Camdessus, a veteran of more than 13 years. And it reinforces speculation that the US wants a politically powerful individual to lead the reform effort.
This US desire for stronger leadership casts doubt on the main European contender so far, Caio Koch-Weser, Germany's deputy finance minister. His candidature is also opposed by some developing countries.
The nomination of a new Fund head is in the hands of the Europeans, and likely to stay there despite efforts by Japan to promote Eisuke Sakakibara, the former vice-minister of finance for international affairs. But no candidate would succeed without US backing and Mr Koch-Weser does not appear to be the political heavyweight Washington wants.
Washington is seeking change at the IMF partly out of domestic political necessity. Congress complains that Mr Camdessus has been guilty of "mission creep" as he has pushed the Fund into new responsibilities. The accusation is only partly true - the IMF's role in the main industrialised economies has declined sharply in the past two decades. However, the Treasury is often accused by Congress of not promoting reform actively enough.
But there is an intellectual impetus too: the Treasury wants to reform the international financial system, both to reduce the frequency of crises and to deal with them more effectively.
Some Treasury thinking has already emerged. It falls short of the most radical of the reforms proposed since the Asian crisis, such as the creation of a world financial authority or a merger between the World Bank and the IMF. And it continues to argue against the systematic use of capital controls as a solution to crises.
Instead, Mr Summers and his predecessor, Robert Rubin, have argued that countries should move away from the exchange rate arrangements that have been at the root of all the serious financial crises of the 1990s: fixed, but adjustable, currencies. The US has said that only in exceptional circumstances will countries following such an arrangement be bailed out by the IMF.
They have emphasised the need to discouraging excessive risk-taking by making sure debtors and creditors understand how modern financial crisis emerge.
They have also nodded in the direction of those who claim the very presence of the IMF may encourage excessive risk-taking. These economists suggest large-scale emergency finance should be priced to make it punitive to borrow.
The implication of this is an IMF that would play a narrower role focused on financial emergencies, particularly those that threaten the global financial system. It suggests the US wants to stop the regular use of some types of fund credit, particularly the sort that looks like longer term development financing. This implies a bigger role in some countries for the World Bank.
"However the current Summers push changes in the next couple of weeks, everybody is agreed that the IMF needs to focus its resources more aggressively on specific cases," says Richard Medley, head of Medley Global Advisors, a New York-based economic advisory group.
The consequence of such a development would be "a leaner husbanding of resources at the IMF", he adds. It also implies the development of "some kind of transnational monitoring facility" at the Fund.
In a world where floating exchange rates were the norm (apart from the occasional currency board arrangement), the Fund would be called on less often to provide finance to defend exchange rate levels in any case.
In the US view, the IMF should move out of the business of long-term support for ailing economies and back closer to its original mandate of dealing with crises stemming from balance of payments problems. This would include both the traditional type of current account shock, such as the impact of a collapse in commodity prices on commodities exporters, and its modern equivalent of a sudden withdrawal of capital from an economy.
However, it appears likely that the US would prefer to keep the IMF as an important actor in the so-called HIPC debt relief initiative for the poorest countries, if only because the deal has just been painstakingly negotiated with Congress and other governments.
Moreover, because of the link between weak domestic financial systems and vulnerability to financial crisis starkly illustrated in recent years, the IMF is likely to stay in the business of monitoring and advising on financial system reform.
However they finally emerge, the US proposals are expected to meet resistance from its partners in the Group of Seven leading industrial nations - and the extended group that Mr Summers will address in Berlin.
In part, this reflects territoriality. Some governments will not approve of proposals that appear to cede responsibility for macroeconomic stability to the World Bank. Finance ministries and central banks control the Fund, but are less influential at the World Bank, whose ideas on development they do not always share.
Moreover, in a world where access to private capital markets can quickly be turned off in a market panic, the IMF's developing country members are also likely to resist a reduction in their sources of official finance.
Hence, Washington wants a strong individual, sympathetic to its views, to head the Fund. Besides Mr Koch-Weser, other European possibilities include Mario Draghi, the respected senior Italian finance official whose main handicap could be his nationality: his countryman, Romano Prodi, heads the European Commission.
Andrew Crockett, the head of the Basle-based Bank for International Settlements, is also handicapped by nationality, being British. The UK government has not pushed his candidature in deference, apparently, to Germany, which supported the candidature of George Robertson, former British defence minister, as head of Nato.
Also being mentioned as possible wild cards are Wim Duisenberg, head of the European Central Bank, and Gordon Brown, the British chancellor. Mr Brown would probably enjoy Washington's backing, but he has denied he is interested.
Washington is signalling there is no hurry to find the right replacement for Mr Camdessus. In fact, a rushed decision in Helsinki would be viewed as counter-productive. David Hale, of the Zurich financial group, says caution would be understandable. "The US has a huge amount at stake here." Whoever gets the job will have to prune the IMF and make it more responsive to the developing world. These two tasks will not be easy to reconcile.