European Economic Perspectives 23

Independence Day

How should the IMF respond to financial crises in emerging markets? A new Report recommends ways to improve crisis prevention and crisis management, and strengthen the legitimacy and accountability of the Fund.

Increasingly severe financial crises in emerging markets have punctuated the final years of the twentieth century. A new Report, published jointly with the International Centre for Monetary and Banking Studies in Geneva, draws lessons from the recent turbulence, with particular attention to the role of the IMF. It concludes that making the Fund truly independent and accountable would give it a far greater chance of success in predicting, averting and managing the volatility associated with open, liquid and internationally integrated financial markets.

Mexico, Asia, Russia and Brazil have all endured severe crises during the 1990s. Sometimes referred to as ‘the first financial crises of the twenty-first century’, these episodes have become more violent, disruptive and difficult to predict and manage because they are now centred in the capital account of developing countries’ balance of payments. This contrasts with earlier crises, which were rooted in imbalances in the current account. But the IMF has yet to integrate this evolution into its diagnoses, procedures and conditions.

To date, the Fund’s response to crisis has been to rely on larger and more heavily front-loaded loans, disbursed more rapidly and accompanied by conditionality that mixes old-fashioned macroeconomic adjustment with deep structural interventions. Whether this approach is appropriate to today’s new circumstances remains open to question. Also at issue is whether the Fund has adapted its staff and governance structure so as to cope with the new challenges.

The Report welcomes the new IMF emphasis on data dissemination and transparency. But the belief that this will strengthen market discipline sufficiently to head off crises before they start is naive, the Report argues. There are also good reasons to doubt whether the Fund can identify reliable early warning signals of impending crises.

The Fund must rethink both its traditional recommendation that crisis countries impose tough monetary and fiscal policies and its recent tendency to provide ever-larger balance of payments financing. Restarting an economy that is the victim of a severe credit crunch may require a wholly different approach, including restructuring foreign currency debts – both public and private – and the adoption of reflationary measures.

There is a strong economic case for the IMF to continue to play a major international role, the Report argues. Yet its governance structure and the representation of its member countries are anachronistic and must be reformed. In particular, the role of the Executive Board is unsatisfactory. Directors are often overwhelmed by the IMF staff and its considerable agenda-setting power. What is more, their decision-making is often driven by national agendas, specifically those of the principal shareholders.

To address these problems, the Report makes the following proposals:

•  The IMF should be made truly independent and accountable. Insulating the Executive Board from the politically driven agendas of national governments would permit it to focus more efficiently on surveillance and conditionality. This requires amending the Articles of Agreement on which the Fund is founded.

•  But independence would be counterproductive without adequate accountability and transparency. The Interim Committee is the logical body to provide oversight of the Fund and hold the Executive Directors accountable for their decisions. If it were given the power to remove Directors who pursue private agendas, the Interim Committee could fulfil these roles. The power of both the Board and the Interim Committee would be strengthened while at the same time creating a clear separation of roles and responsibilities.

•  The Board should be accountable not only to governments but also to the public at large. Publishing detailed minutes of Board meetings, requiring decisions through voting rather than consensus, and publishing voting records of the Executive Directors would move the Fund into the modern era of transparency.

•  The perception of excessive influence from the US Treasury – unavoidable given its geographical and intellectual proximity to the Fund – would be lessened by reducing from 85% to 80% of votes the current ‘supermajority’ needed for the most important IMF decisions. Then no one country would have a veto.

This article summarizes ‘An Independent and Accountable IMF’, the first Geneva Report on the World Economy (CEPR, 1999) by José De Gregorio (Universidad de Chile), Barry Eichengreen (University of California, Berkeley, and CEPR), Takatoshi Ito (Hitotsubashi University) and Charles Wyplosz (Graduate Institute of International Studies, Geneva, and CEPR).

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