FT columnist Martin Wolf describes the organization as largely "irrelevant" - a consequence of the changed nature of global finance. It was created in 1944 to manage a fixed-exchange regime tied to the gold-linked US dollar, but that system disappeared in the early 70s. Currencies now float freely; reserves are held mostly by central bankers, private banks, and other corporations; few countries draw on its assistance; and the US and other wealthy shareholders are reluctant to strengthen it. They would like to scrap it, but as that would not be seemly, they are trying to reduce it instead.
Despite the shine which Wolf tries to give it, the article suggests the way the IMF's role is being redefined: as a purportedly "independent" global think tank giving advice to, and providing a meeting place for, policymakers to discuss financial "risks" to the world economy, joining the multiplicity of public and private research agencies and forums which already exist for this purpose - MG. ----------------------------------- Martin Wolf: World needs independent Fund By Martin Wolf Financial Times February 21 2006
If the International Monetary Fund did not exist, we would not re-invent it. This is not because it is useless, but because today's world lacks the courage and vision to create powerful multilateral institutions. That fact alone makes those we have inherited more valuable. Even so, they must be kept up-to-date. Otherwise, they risk suffering a lengthy senescence. This danger now threatens the Fund.
Three questions need to be addressed. First, how has the world changed since the 1944 conference at Bretton Woods, New Hampshire, where the Fund was created? Second, what (if anything) is its contemporary role? Third, what changes are needed if it is to play it? Mervyn King, governor of the Bank of England, addressed just these questions in a thought-provoking speech in New Delhi, on Monday.*
If the answer to the second question were "none", we would need to go no further. It is not. An institution concerned with international monetary stability continues to have a role. But the world has changed in fundamental respects. The system of quasi-fixed exchange rates among all significant currencies vanished in the 1970s. Controls on the capital account have disappeared in the high-income countries and are on the way out (or have already been removed) in many emerging countries. In addition, not only do private capital flows and holdings of foreign assets dwarf Fund resources, but so do official holdings of foreign currency reserves. Finally, use of IMF resources has fallen to minimal levels (see chart), though this could change again. Today, however, Turkey alone owes 72 per cent of the total outstanding amount of $18.2bn (?15.2bn) advanced under normal arrangements.
Given these realities, Mr King reports criticism that the Fund "has lost its way". He agrees that its "remit is unclear". So let us clarify. What are the public goods that such an institution might provide? They fall into six categories: information; analysis; advice to individual governments; advice on co-ordination of policies; management of defaults; and emergency lending.
Being specifically concerned with international monetary stability, Mr King focuses on provision of the information, analysis and advice needed for international co-operation. Specifically, he recommends the execution of three tasks: first, the IMF "should provide and share information about the balance sheets of all major countries, their composition and size, and the links between them"; second, it should "encourage countries to abide by their commitments to each other by promoting greater transparency about national policies"; and, third, it should provide "a forum for national authorities to discuss risks to the world economy".
Mr King's view is not an isolated one. Rodrigo de Rato, the Fund's managing director, has himself stated that "we need a sharper focus to our surveillance, particularly of the larger, systemically important economies".** Mr King notes, however, that the Fund's only asset is its power of analysis, persuasion and "ruthless truth-telling", in the words of John Maynard Keynes. That phrase, he says, does not "conjure up many memories of any of the many international meetings I have attended". If this is to change, the IMF needs an "independent, respected and clear voice".
Do Mr King's three tasks exhaust the Fund's role? The answer is "no".
First, the Fund continues to have a role as an adviser on fiscal, monetary and financial stability to countries that lack systemic significance. The view is often advanced that such advice only works when accompanied with loans. But this suggests that recipients do not value the advice.
Second, the abandonment of an active role in dealing with insolvency and illiquidity would be a pity. The Fund should guide parties on reasonable burden-sharing in the event of a default. Ideally, the Fund should also provide greater reserve-pooling, since it is costly for countries to self-insure on the present scale. The investment of $4,100bn in foreign currency reserves by November of last year was a boon to countries whose liabilities are held in these reserves, but imposes a substantial cost on those investing in them. Yet pooling reserves on a scale sufficient to tackle another systemic crisis would require far bigger IMF resources than are likely to be agreed.
In practice, therefore, Mr King has defined the tasks that are important and feasible. If the IMF is to deliver, however, it must become credibly independent. We should, he suggests, move back to Keynes' original conception of an IMF under the control of the managing director with oversight by purely part-time executive directors. The constant interference by the present resident board subverts independence. With today's transport and communications technology, a non-resident Board could do the job. In addition, I suggest, the managing director should be selected from a global pool of candidates for a non-renewable term of at least six years.
Reform of the IMF does not exhaust the agenda for international monetary stability. As Mr King notes, the growth of the "G" groups - the G7, the G20 and so forth - has become cancerous. The highest priority is to widen the G7 meetings of finance ministers and central bankers to include other systemically important countries, particularly China. The Fund staff also needs to be allowed to provide fully independent advice and analysis to such a reformed G7.
Let us be brutal: the IMF is on the brink not just of "obscurity", as Mr King suggests, but of irrelevance. Yet big tasks remain. Even if its role as lender of last resort is falling into abeyance, it can still guide national decision-making, particularly in strengthening global stability. If it is to do that, however, it must become a tough-minded and independent organisation, willing and able to criticise powerful governments both publicly and forcefully. Such an IMF is the last thing its powerful shareholders now desire. Yet it is also in their own long-run interests. They have increasingly recognised this logic in the creation of independent central banking. They should recognise the same logic in the creation of truly independent global surveillance.