Commentary Type

Comments on the Address of the Managing Director of the IMF

Peter B. Kenen (Princeton University)

Remarks made at the book release meeting "Reforming the IMF for the 21st Century" Institute for International Economics Washington, DC


Let me begin by congratulating the Managing Director on advancing cogent and comprehensive proposals addressing the challenges that face the International Monetary Fund (IMF) and its member governments.
Let me not use my few minutes, however, to talk about matters on which we agree, but rather to worry aloud about one such proposal and to make a radical proposal for dealing with one of the challenges facing the Fund.

I turn first to a problem inherent in devising a precautionary facility-a viable successor to the Contingent Credit Lines (CCL), then to the far more contentious task of reforming the Fund's governance, not only by reapportioning quotas, but also by reapportioning responsibilities within the Fund's governing structure.

A New Precautionary Facility

A recent paper by Tito Cordella and Eduardo Levy Yeyati sets out a plan for a Country Insurance Facility in which a government's eligibility would be determined by "readily observable criteria" pertaining to the sustainability of the country's external debt burden. The proposal, however, has two flaws.

First, it is focused exclusively on sovereign debt, yet some of the main emerging-market crises of the 1990s were triggered by excessive accumulations of private-sector debt.

Second, "readily observable criteria" for eligibility would be observable not only to the IMF but also to the country's private-sector creditors. There is thus the risk that a deterioration in an officially sanctioned measure of debt sustainability could trigger a debt crisis, even if the deterioration was not sufficiently severe to cut the country off from the new facility.

The same paper, moreover, examined retrospectively the eligibility of 34 countries, and it found that only 14 countries would have been eligible for all of or part of the 11-year period covered by the paper. Furthermore, 12 of those countries would have lost their eligibility at one point or another.

While some of the defects of this particular plan could probably be rectified, I have reservations about the value added by proposals of this sort.

The Governance of the Fund

A selective increase of IMF quotas would help to reapportion voting power in the governing bodies of the IMF. I venture to suggest, however, that the politically feasible redistribution of voting power will not be big enough to satisfy the legitimate aspirations of some of the Fund's members. Therefore, I'd like to suggest a different strategy-a reform of the governing structure of the IMF.

My proposal is inspired in part by the way in which many central banks manage the making of monetary policy. Operational responsibility is vested in an appointed group of highly qualified individuals, but the main objectives of monetary policy are laid down by governments, whether by legislation, as in case of the United States; by treaty as in the case of the European Central Bank; or by the Finance Minister, as in the United Kingdom and some other countries.

I therefore suggest that the governance of the IMF be vested in two new bodies-a Managing Board that would replace the present Executive Board and a Council of the sort described by Schedule D attached to the present Articles of the Agreement.

The Managing Board would consist of, say, 16 individuals nominated by the Managing Director after extensive consultation and with due regard for the need to reflect the differing interests and concerns of the Fund's large membership. The Managing Board would oversee the day-to-day work of the Fund. It would also have the power to approve quota-based drawings, the task of reviewing the results of Article IV consultations, and, most importantly, the task of reviewing and endorsing an enhanced version of the World Economic Outlook (WEO). That new version would contain not only the staff's forecasts for the world economy but would also contain clear recommendations, not merely a set of policy options, aimed at correcting major imbalances in the world economy and reducing the principal risks facing the world economy. The Managing Board would submit the final version of the WEO to the Council as the basis for the Council's deliberations and its own policy recommendations.

The Council would comprise Ministers of Finance or "persons of comparable rank" and would reach its decisions by quota-based voting. It would appoint the Managing Director, ratify appointments to the Managing Board, adopt the Fund's budget, and be charged with approving or rejecting members' requests for IMF financing outside the normal quota-based limits (e.g., those involving the use of the Supplemental Reserve Facility). It would also debate the final version of the WEO adopted by the Managing Board and make its own policy recommendations to the governments concerned, rather than issue anodyne communiqués on the state of the world economy. It would replace the International Monetary and Financial Committee (IMFC) but would be a decision-making body in its own right.

Finally, I would urge the Managing Director to review the long lists of decisions that have now to be taken by qualified majorities of 70 or 85 percent, with a view to seeking agreement on shortening those lists.

I believe that this sort of restructuring would greatly enhance the legitimacy of the IMF in the eyes of all its members. I also believe that all of its members should seek to achieve that objective, even those that would have to accept a reduction in their own governments' influence over the Fund's policies. And let me note in that connection that the substitution of the Managing Board for the existing Executive Board would go far in that direction: Each member of that body would have one vote, regardless of the quota-based voting power of that member's country.

I would not expect these proposals to be adopted quickly, but if I am right in my belief that a feasible redistribution of quotas and votes will fail to meet the legitimate expectations of many Fund members, a more radical restructuring of the Fund's governance like the one I have proposed would receive serious considerations.

Let me close by assuring the Managing Director that I am not a candidate for membership in the new Managing Board I have just described. At my rapidly advancing age, I can't even read 5,000 pages per year, let alone the 82,000 pages that the present Executive Directors are supposed to read.

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