The international monetary and financial system has witnessed tremendous change over the recent decades. Rapid expansion in cross-border capital flows, continued financial innovation, and deepening financial markets pose increasing challenges not only for national policy makers, but also for international financial institutions. This has been particularly true of the IMF as it seeks to serve its global membership, and it has triggered a critically important discussion of the Fund’s strategic direction.
The IMF’s current strategic review does not start from scratch. The reform process was launched at the end of the 1990’s and was continued by former Managing Director Horst Köhler with important initiatives. These initiatives – particularly efforts to strengthen the IMF’s surveillance function and the so-called “exceptional access framework” – must now be locked in and implemented consistently.
For example, the introduction of standards and codes, reports on their observation (ROSC’s), Financial Sector Assessment Programs (FSAP’s), and the resulting increase in the Fund’s transparency might contribute to an improvement of bilateral, regional, and multilateral surveillance. The exceptional access policy, which seeks to both enhance the predictability of the Fund’s lending policy and to safeguard its financial position, is still waiting for its first real test.
But the world needs to look beyond even these issues. The IMF’s management shares many strategic considerations repeatedly raised by the Bundesbank, which has argued that the Fund should limit its activities to its core mandate: promoting monetary and financial stability. Thus, the IMF’s role in the international monetary system should not go beyond applying its key instruments for promoting macroeconomic stability: surveillance and economic policy advice.
In fact, these two instruments should go hand in hand as the IMF’s internal reforms continue. Increasing analytical focus and improving transparency by providing comprehensive advice and timely information would serve to strengthen surveillance further.
By contrast, an IMF that attempted to act, say, as an international umpire of national exchange-rate policies would face insurmountable implementation and acceptance problems. Similarly, positioning the IMF as a general risk insurer by introducing precautionary credit lines above normal access limits would be compatible neither with its mission to provide financial assistance on deliberately non-risk-adjusted terms nor with the current system of refinancing short-term Fund credit through risk-free official reserves. Only in true balance-of-payments crises should the IMF stand ready to provide limited temporary financial assistance to member countries, thereby encouraging their own policy adjustments and signaling this commitment to the markets.
Nor is becoming a development institution consistent with the Fund’s mission. Development financing should be left to the World Bank. By concentrating on their specific comparative advantages in line with clearly defined mandates, both institutions will fulfill their tasks more efficiently.
Indeed, the implementation of the Multilateral Debt Relief initiated by the G-8 already provides an unprecedented opportunity to complete the process of debt relief for a large number of low-income countries. This also opens the way for the IMF to dispose of its current diffusion of activity in low-income countries and intensify its agenda in the areas of its core expertise.
Finally, adequate representation and the right of each member to have a say in the Fund is a prerequisite of the legitimacy that the IMF needs to fulfill its global role. The quota distribution should be guided by members’ economic weight and degree of integration into the global economy, and any quota adjustments must be undertaken in a coherent manner that applies the same standard for all countries. But, in order to maintain the creditor countries’ willingness to contribute to the Fund’s finances, a strong link must be maintained between quotas, on the one hand, and voting rights, access to IMF resources, and financial contributions on the other hand.
The issue of representation is an important component of the IMF’s strategic review. However, that review, and the reforms that follow from it, must be much more comprehensive in order to benefit the Fund and all of its members.