IMFSurvey Magazine: Interview
INTERVIEW WITH ANDREW CROCKETT
Panel Seeks More Stable Income for IMF
By Laura Wallace
IMF Survey online
February 12, 2007
- The IMF needs to urgently consider how to replace its present income model with a new one
- The existing income model is inappropriate in a structural sense for the Fund's needs
- The package is practical because it relates the sources of income to expenditures
Andrew Crockett, President of JPMorgan Chase International, recently unveiled a set of proposals for a new income model for the IMF, drawing on the work of an eight-member Committee of Eminent Persons that he chaired.
Previously he was General Manager of the Swiss-based Bank for International Settlements (1994-2003), an IMF staff member (1972-89), and an Executive Director of the Bank of England (1989-93). He spoke with Laura Wallace of the IMF Survey about the proposals, some of which are bound to be controversial.
IMF Survey: Why do we need to look at the income model now? Is it an issue of the level of income or how the income generating system functions?
Crockett: There's no immediate need, from a financial point of view, for the Fund to have additional income. The reserves built up over the years provide a substantial cushion. But it's becoming apparent that the existing income model is inappropriate in a structural sense for the Fund's needs, and right now, it's not generating enough income to cover expenses—which means reserves are being run down. Thus, we think that the Fund needs to urgently consider how to replace the present income model with a new one.
IMF Survey: If the IMF were created today, would it be based on the current model, which involves such a volatile source of income?
Crockett: Probably not. It was obviously at one time considered appropriate that a financial institution should generate its income out of the intermediation margin between its lending and borrowing rates. But the IMF now has a much wider range of activities than just lending. Since it provides what economists call a public good—and public goods by definition can't be provided out of charges to users—it needs a different income model. And if it simply uses the surplus generated out of lending to finance the public goods, first, that's volatile, and second, that's essentially a tax on those that use one element of the Fund's services—namely its financial intermediation—to benefit the others.
IMF Survey: You've come up with a package of proposals. Do all the elements have to be pursued simultaneously?
Crockett: It makes sense to see them as a package and therefore to implement them as a package. The Fund now has multiple functions, and there are multiple income sources that would be a natural source of finance for those functions. Of course, certain recommendations will require more work; those that require changes to the IMF's Articles of Agreement couldn't be put in place as quickly as the others.
IMF Survey: How does your package fit with the IMF's medium-term strategy?
Crockett: It's separate but related. The medium-term strategy, which hasn't been completed yet, will undoubtedly refine certain elements of the Fund's mission. Once the strategy and the Fund's mission are determined, it will be up to the Managing Director and the Executive Board to determine the resources needed to fulfill that mission. Then the membership at large, through the Board of Governors and the Executive Board, will vote, in a sense, on the appropriate level of expenditures. Our work was to recommend how to generate income to cover those agreed expenditures. Obviously, income and expenditure can't be separated, but we were asked to focus on the income side.
"The Fund now has multiple functions, and there are multiple income sources that would be a natural source of finance for those functions"
IMF Survey: So expenditure wasn't a part of the calculus?
Crockett: We worked from an estimate that was provided by the Fund staff as to the future path of expenditures and the future path of incomes, if nothing was done. That provided us with a basis to determine the shortfall. We don't know whether that expenditure path will be precisely what is approved by the Board of Governors and the Executive Board, but our recommendations can be adjusted to provide needed income.
IMF Survey: Does that open the door for the IMF to take on additional responsibilities?
Crockett: One of the virtues of what we're proposing is that it provides a degree of discipline—that is, the Fund would be asked to take on additional functions only if they could be justified through clearly identified financing. One of the problems in the past is that the membership, believing the Fund to be a rich organization, has asked it to take on new functions without really thinking about how they would be financed.
IMF Survey: The U.S. Congress has opposed IMF gold sales before. What would be different this time, and how could sales be undertaken without disrupting the market?
Crockett: We haven't designed our proposals to take into account specific political objections. We've focused on what makes sense as an economically rational package. But we're of course aware that the Fund shouldn't do anything to potentially disrupt the gold market or to introduce volatility into the gold price. That's why we've suggested a few safeguards. First, the amount is limited to the portion of the Fund's gold—about 400 tons—that had been sold and repurchased in a transaction about seven years ago. Second, the sales should be fitted in with the existing sales programs of central banks, mainly European ones, so that they won't result in any additional gold sales. Third, the IMF should set up a group that examines the technicalities of the marketing of gold.
"We've focused on what makes sense as an economically rational package"
IMF Survey: Is this different from what's been proposed in the past for IMF gold sales?
Crockett: I think it is, because what we've suggested means that there would be no additionality of gold sales. It would simply take the place of some gold sales that would have been done by other parts of the public sector, other official sellers.
IMF Survey: Given that some proposals would require amendments to the Articles, how practical is the package?
Crockett: The main proposal that would require an amendment is that usable currencies contributed by members as part of their quotas should be available to the Fund for investment in capital markets—and then the return on that investment would become income for the Fund. Currently, all members have the right to immediately repurchase the resources they've placed with the Fund, which is called a reserve tranche. We believe it's appropriate that the Fund have access to those resources to invest, rather than to always be in the position of having to return them to members.
Is the package practical? We think so because it relates the sources of income to expenditures. And I believe that the proposals endorsed by our group—which includes Mr. Trichet, Mr. Greenspan, Mr. Zhou Xiaochuan, and several other central bank governors with long experience in the international monetary system, several of whom have been ministers of finance as well—ought to appeal to Fund members.
IMF Survey: How would investments be managed under a less restrictive investment mandate? Are you worried about potential conflicts of interest for IMF staff?
Crockett: The present mandate is actually so restrictive that it prevents the Fund from investing in certain instruments that the World Bank or the multilateral development banks can invest in. So we're not proposing anything excessively liberal or risky.
"Investments can be placed in the hands of professional managers, whose fees and charges would be small relative to the additional income"
The question of conflict of interest was one that we thought about quite a lot because, although I believe it's more optical than real, the Fund does have access to the thinking of member countries about their macroeconomic policies, and it makes recommendations about these policies. That obviously has an effect on interest rates and exchange rates and on all the factors that would affect the return on the Fund's investment. So we suggest one of two approaches.
The first, which we favor, is that the investments should be handled by an outside body, as is the case at the moment with the Fund's existing reserves. Investments can be placed in the hands of professional managers, whose fees and charges would be small relative to the additional income. The other possibility would be for the Fund to invest the funds itself, with a dedicated staff with "Chinese walls" to prevent communication between the staff doing the investment and the staff that might have access to privileged information. But that approach would require hiring additional staff, and we don't really see it as desirable as using third-party managers. The third-party managers, incidentally, could include public sector organizations like the World Bank, whose Treasury Department is very competent, or the Bank for International Settlements.
IMF Survey: Finally, with such a geographically dispersed group, how were the deliberations conducted?
Crockett: Given that five of the eight members were central bank governors, the most convenient place was at the bimonthly governors' meetings in Basel, although one meeting was held in Melbourne at the time of the G-20 meetings. Alan Greenspan is writing a book and didn't want to take time out, so he came to the IMF's Washington headquarters—once in the middle of the night—and we met by videoconferencing with him.