Advice to the Obama Administration: Focus on the Global Recession and the IMF not on Financial Sector Reform
One of the many urgent matters confronting the Obama administration is an action agenda for the G-20 economic summit meeting in April to be hosted by Prime Minister Gordon Brown.1 At their first summit in November, the G-20 leaders declared that their next meeting should focus primarily on an overhaul of global financial markets and regulatory regimes. The president-elect and his team should respectfully decline to agree to address these issues at this time. The saber rattling in this area is already exacerbating the recession in a classic exercise of the type of procyclical regulatory response that the experts cite, correctly, as having contributed to the boom.
Instead Obama and his team should focus on what looks like the worst global recession of the post–World War II period and seek to shore up the capacity of the international financial institutions, specifically the International Monetary Fund (IMF), to help cushion the effects of the crisis on the most vulnerable countries. With respect to countercyclical policies, all countries should agree within their respective capacities to use the instruments of countercyclical fiscal and monetary policy to help rebalance the world economy. If some countries in stronger positions like Germany decline to participate and do their fair share, they should be shamed into abandoning their free-rider postures. At the same time, the IMF should be urged to be vigilant in its surveillance of exchange rate policies to help discourage beggar-thy-neighbor policies by countries like China and Japan, which had large current account surpluses going into the global recession.
The most serious need to be addressed is the capacity of the IMF to meet demands for financial assistance. I recommend that the Obama administration put forward three proposals in this area.
First, the new administration should call for a doubling of IMF quotas. Such a step would produce about $200 billion in additional resources for the Fund to use to lend to countries. It should also call for a doubling of commitments to the Fund's emergency borrowing arrangements—the General Arrangements to Borrow and the New Arrangements to Borrow—which would produce an additional $50 billion in potential resources.
If one thinks that doubling the IMF's lending capacity to $500 billion from where it was at the end of the summer is excessive, I would point out that through the end of November the Fund had made $42 billion in additional lending commitments and set aside $100 billion for its new short-term lending facility (SLF). At the same time, the Federal Reserve has advanced more than $500 billion to foreign central banks. The European Central Bank and the Swiss National Bank have advanced smaller amounts.
As part of this element in their proposal, the Obama administration should also address the IMF legitimacy crisis that was left in limbo last April. At that time, the IMF executive board adopted a flawed new formula for the allocation of IMF quotas. (IMF quotas determine the amounts that members must lend to the Fund, the basis for the size of loans they may receive from the Fund, and their absolute and relative voting power in the institution.) The problem with the new formula is that it points to an increase in the voting power of the traditional industrial countries, in particular European countries, compared with their current voting power. The legitimacy of the Fund requires the opposite. Fortunately, the IMF executive board proceeded to ignore the new formula when it proposed a modest round of ad hoc quota increases that would increase total quotas a minuscule 9 percent. The Obama administration should demonstrate its support of multilateral institutions and favor a substantial redistribution of voting power away from the traditional industrial countries as a group of at least an additional 5 percentage points.
Second, the new administration should call for a special, one-time allocation of $50 billion in Special Drawing Rights (SDR). This would increase the existing stock of SDR by about 2.5 times. The industrial countries unfortunately would receive a disproportionate share, about 60 percent, because SDR are allocated on the basis of existing quota shares. However, the remaining 40 percent would go to countries that could use the associated reserves to help cushion the effects of the global recession.
More important, such an allocation of SDR would be a confidence-building step, signaling both the capacity of the members of the Fund to work together collectively and decisively as well as the fact that the pressing macroeconomic concern for the next several years is deficient global demand, not a risk of inflation. Moreover, to the extent that countries pursue polices that weaken their currencies in order to increase their current account surpluses and thus rebuild their reserves, an SDR allocation would help to meet that need for reserves.
Third, the new administration should propose an amendment to the IMF Articles of Agreement that would allow the Fund to swap SDR for national currencies of certain member countries whose currencies are central to the functioning of global financial markets. (The scale of swaps should be unlimited in amount but limited in total maturity, combining the initial three-month swap with subsequent rollovers.) These currencies would be used in the future to help to fund the IMF's SLF. This would centralize the responsibility and risk associated with this type of international liquidity support, replacing the operations of the Federal Reserve and other major central banks during the current crisis. Providing the Fund with this authority, at the same time that national central banks were authorized to participate on the other side of the swap, would help to support the central role of the IMF in the international financial system, discourage countries from setting up bilateral or regional arrangements in order to bypass IMF policy conditionality, and help to rebind the major central banks to the Fund.2
These three proposals are consistent with the decision of the G-20 summit on November 15, 2008, to "review the adequacy of the resources of the IMF ... and stand ready to increase them when necessary." By embracing these proposals, the Obama administration would be showing responsible leadership as well as support for the IMF as the central institution of international monetary cooperation by augmenting its resources, addressing the problem of its legitimacy, and proactively addressing some of the financial issues revealed by the global recession and financial crisis.
1. Informal indications are that April 2 has been chosen, which would be 10 weeks after Obama and his skeleton team have taken office.
2. Although drawings on the SLF are based on the preexisting quality of a member's economic and financial policies, the implicit understanding is that if a country cannot repay within 9 months, it will have to alter its economic and financial policies in the context of a traditional IMF adjustment program.
This article is based on Working Paper 08-11: On What Terms Is the IMF Worth Funding?