WASHINGTON, DC – When Ministers meet for the IMF’s Spring Meeting this month they will find an institution with regained self-confidence. The London G20 summit gave a strengthened mandate to the IMF, while tripling its resources. More concessional finance will be available for low-income countries, and international liquidity will be increased by a hand-out of $ 250 billion in special drawing rights (SDRs). This is a boost for the IMF, and it gives hope to emerging and developing countries that have been severely hit by a crisis that originated elsewhere.
The IMF is well-positioned to help its members overcome the financing gaps resulting from the crisis. In the run-up to the G20 summit access to the Fund’s credit facilities was increased and policy conditions were streamlined. In a watershed with former practice, a new non-conditional credit line was introduced for well-performing countries. Mexico and Poland will be its first users and more countries will line up. These more flexible lending policies reflect a new image of the IMF. The negative stigma attached to IMF financing is a thing of the past.
Its financing role in this crisis secured, the IMF now needs to strengthen its position as guardian of an open international financial system. The IMF was created to prevent crises like the current one and in this it has failed. Admittedly, there were warnings, but policy makers, particularly in advanced countries, did not follow suit.
The ‘new’ IMF should be an institution that communicates better with its members, balances the interests of its advanced, emerging and developing members in an evenhanded manner, and aligns its policies better to the needs of the moment. Now that the IMF has been given a second lifetime, it needs to regain its central position in the international financial system. For this, it needs to focus on three issues: improved surveillance of financial stability, strengthened international coordination, and an updated decision-making process.
The new IMF needs to become more vocal on global financial stability issues. The IMF should see to it that there are no gaps in the surveillance of financial institutions. It can help shape a more robust global supervisory system which needs to be built in order to preserve the benefits of global financial markets. And it should help develop a vision on what the future financial landscape should look like.
To this end IMF surveillance should include regular updates on supervisory regimes in systemically important countries. Early warnings, commissioned by the G20, should be specific and the IMF should monitor whether policymakers give follow-up to the Fund’s advice.
The new IMF needs to take a fresh look at international policy coordination. The demand for a different monetary order, as advocated by China, sets the stage for a renewed effort to avoid the international imbalances which were at the root of this crisis.
First, the US saving deficit will need to be addressed in a sustainable manner. Second, China will have to make its currency convertible. Third, the position of the euro will strengthen over time as more countries will join the euro zone.
With more key currencies in place, the perspective of a truly multipolar currency system comes in sight, with an increased role for the SDR. This will lessen the need felt by emerging economies for self-insurance against financial instability, by building up large reserves.
Finally, the new IMF needs governance structures that better reflect today’s new global realities. The perception that advanced countries are running business in the Fund, but do not adhere to Fund advice, has undermined the IMF’s authority.
The G20 summit marked the return of the United States to multilateralism. This acceptance of collective responsibility should come with abandoning US veto power in the IMF by lowering required voting majorities, as well as abandoning Europe’s prerogative of appointing the Managing Director. One of the strengths of the IMF’s present governance structure, the constituency system, should be duplicated at the G20 as well, so as to ensure inclusiveness.
The rapid growth of China, India, and other emerging countries should come with increased influence, to be implemented through the planned quota increase in 2011. Advanced countries, including European countries, will see a relative decrease in voting power. An increased say for emerging economies will imply taking more international responsibility as well, also in financial terms.
Now European countries finance 42% of IMF lending and 62% of concessional World Bank lending. This task will have to be shared by emerging countries with large reserves. These reserves are put to better use by assisting the IMF in maintaining an open and stable financial system and prevent crises like these from recurring