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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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