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Tuesday, February 21, 2006

Martin Wolf on Modernizing the IMF

Martin Wolf discusses how the IMF can avoid falling into obscurity and irrelevance:

World needs independent Fund, by Martin Wolf, Financial Times: If the International Monetary Fund did not exist, we would not re-invent it. This is not because it is useless, but because today’s world lacks the courage and vision to create powerful multilateral institutions. That fact alone makes those we have inherited more valuable. Even so, they must be kept up-to-date. Otherwise, they risk suffering a lengthy senescence. This danger now threatens the Fund.

Three questions need to be addressed. First, how has the world changed since the 1944 conference at Bretton Woods... where the Fund was created? Second, what (if anything) is its contemporary role? Third, what changes are needed if it is to play it? Mervyn King, governor of the Bank of England, addressed just these questions in a thought-provoking speech in New Delhi, on Monday.

If the answer to the second question were “none”, we would need to go no further. It is not. An institution concerned with international monetary stability continues to have a role. But the world has changed in fundamental respects. The system of quasi-fixed exchange rates ... vanished in the 1970s. Controls on the capital account have disappeared in the high-income countries and are on the way out ... in many emerging countries. ... Finally, use of IMF resources has fallen to minimal levels, though this could change again...

What are the public goods that such an institution might provide? They fall into six categories: information; analysis; advice to individual governments; advice on co-ordination of policies; management of defaults; and emergency lending. Being specifically concerned with international monetary stability, Mr King focuses on provision of the information, analysis and advice needed for international co-operation. 

Specifically, he recommends the execution of three tasks: first, the IMF “should provide and share information about the balance sheets of all major countries, their composition and size, and the links between them”; second, it should “encourage countries to abide by their commitments to each other by promoting greater transparency about national policies”; and, third, it should provide “a forum for national authorities to discuss risks to the world economy”. ...

Mr King notes, however, that the Fund’s only asset is its power of analysis, persuasion and “ruthless truth-telling”, in the words of John Maynard Keynes. That phrase, he says, does not “conjure up many memories of any of the many international meetings I have attended”. If this is to change, the IMF needs an “independent, respected and clear voice”.

Do Mr King’s three tasks exhaust the Fund’s role? The answer is “no”. First, the Fund continues to have a role as an adviser on fiscal, monetary and financial stability to countries that lack systemic significance. The view is often advanced that such advice only works when accompanied with loans. But this suggests that recipients do not value the advice. Second, the abandonment of an active role in dealing with insolvency and illiquidity would be a pity. ...

If the IMF is to deliver, however, it must become credibly independent. ... Let us be brutal: the IMF is on the brink not just of “obscurity”, as  Mr King suggests, but of irrelevance. ... Even if its role as lender of last resort is falling into abeyance, it can still guide national decision-making, particularly in strengthening global stability. If it is to do that, however, it must become a tough-minded and independent organisation, willing and able to criticise powerful governments both publicly and forcefully. Such an IMF is the last thing its powerful shareholders now desire. Yet it is also in their own long-run interests. They have increasingly recognised this logic in the creation of independent central banking. They should recognise the same logic in the creation of truly independent global surveillance.

    Posted by on Tuesday, February 21, 2006 at 05:34 PM in Economics, International Finance | Permalink  TrackBack (0)  Comments (2)

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