## An IMF for Tomorrow

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**Canonical URL:** [An IMF for Tomorrow](https://www.imf.org/-/media/files/publications/fandd/article/2024/06/posen.pdf)

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### Core mission: why the IMF remains central
- The IMF turns "80" and its core macroeconomic mission "still deserves to be pursued and prioritized."
- The IMF’s central roles:
  - Provide credible conditional adjustment financing when member economies lose access to financial markets or suffer capital flight.
  - Cushion groups of economies from common economic shocks.
  - Restore access to market liquidity while restructuring international debt obligations.
  - Manage the international monetary system that underlies cross-border commerce and financial flows.
- Persistent problems in international finance that the IMF addresses:
  - "Exchange rate flexibility allows for monetary independence, yielding low inflation, but still does not prevent sudden stops and financial crises."
  - "Foreign economic shocks are still transmitted, often with substantial effects on smaller and lower-income countries."
  - "Capital flows often drive large rapid fluctuations in current account deficits."
  - "Interruptions in the availability of dollar liquidity to member economies have major repercussions, sometimes causing financial crises."
  - "Self-insurance efforts by large-surplus economies—whether through currency manipulation or replacement of imports with subsidies and tariffs—reduce global growth and impose adjustments during recessions on others."

### Threats from geopolitical fragmentation and corrosion of globalization
- The "ongoing corrosion of globalization—reinforcing and being reinforced by geopolitical fragmentation—increases the vulnerability of all but the largest economies" to:
  - Foreign economic shocks.
  - Arbitrary swings in current account balances.
  - Interruptions in access to dollar liquidity.
  - Accumulation of unsustainable debt.
- The increasing politicization of international finance and commerce by the "big three"—China, the European Union, and the United States—risks the IMF’s ability to assist members and limit exploitative behavior by those governments.
- Specific behaviors of concern:
  - Conditioning access to payment systems or fossil fuel exports on national security goals, which causes global uncertainty.
  - Linking market access to political loyalty tests or side payments, affecting exports, employment, technology, financial services, foreign direct investment, and cross-border aid and lending.
- Historical references:
  - "The creation of the Bretton Woods institutions 80 years ago was aimed to prevent" national-security-driven fragmentation.
  - "For the first time since the 1980s, military conflicts directly involving the major powers’ allies on opposite sides are occurring and are likely to continue."

### Surveillance, evenhandedness, and the IMF’s unique authority
- Surveillance benefits:
  - Consistent surveillance of spillovers from self-insurance policies of the largest economies can produce small achievable changes that benefit many, boost IMF credibility, and reduce systemic risk.
  - Only the IMF can act as a quasi-lender of last resort and "speaker of truth to economic power on debt and monetary issues."
  - The IMF can influence small changes in lenders’ and reserve currency issuers’ behavior by coordinating on cross-border debt and monetary issues.
- The IMF’s unique comparative advantages:
  - It is the only multilateral institution that deals directly with cross-border spillovers and macroeconomic volatility on a near-universal basis.
  - It is the only multilateral institution that can credibly engage in macroeconomic conditionality that may change borrower policies.
  - It is the only international entity that can force private-sector negotiation on debt restructuring and chide the big three in precise terms regarding their policies.
- Need for consistent criteria:
  - "The EU, the US, and China have a common interest in making sure that each is criticized according to the same criteria, with the same frequency, and through the same public channels."
  - The IMF should prioritize "independent frankness rather than a mutual nonaggression pact."

### Operational independence: rationale and proposals
- Rationale:
  - Greater operational independence would shield IMF decision making from the geopolitical machinations of large-economy governments and the market flows they influence.
  - Narrowing the IMF’s mandate to core functions in exchange for more autonomy in specific policy decisions will strengthen legitimacy and efficacy.
- Concrete proposals and institutional changes:
  - Seek "greater operational independence, akin to that of most central banks," while maintaining external evaluation and member-set goals.
  - Increase the IMF executive board’s ability to pass decisions by "qualified majority voting" to restrict the largest shareholder’s ability to exercise a veto, "except on long-term or quasi-constitutional issues."
  - Adopt "stricter and more consistent rules limiting IMF lending to economies at war," with specific reference to "Israel, the West Bank and Gaza, and Ukraine" as contemporary examples where ongoing conflict complicates impartial lending.
  - Secure a mutual agreement among the US, the EU, and China to give the IMF operational insulation with "clear limits on what the IMF can address" so that none can exercise control in situations that matter to them.
- Trade-offs:
  - Yield some turf in governance deals without compromising evenhanded treatment of members.
  - Exchange a narrower remit for operational insulation to avoid mission creep and to reassure large shareholders about perceived risks to taxpayer funds.

### Policy recommendations and implications for members
- For the IMF:
  - Focus on core macroeconomic functions: crisis lending with conditionality, surveillance of spillovers, and management/defense of the international monetary system.
  - Maintain technocratic evenhandedness in substance and process across members to preserve legitimacy—"even at the expense of some local support in short run."
  - Use surveillance to call out politicized measures by China, the US, and the EU that limit market access or condition trade on political goals.
  - Provide special facilities or common-term lending when simultaneous shocks hit many members; insist that the big three change behavior or offset shocks.
- For member countries (especially low- and middle-income):
  - View the moment of geopolitical retrenchment as an opportunity to have more say on matters that affect them deeply.
  - Support enhanced IMF operational independence coupled with continued accountability to the board for evaluation and goal setting.
- For the big three:
  - Recognize that mutual agreement to insulate IMF operations would prevent recurrent pressures to make the institution choose sides and would stabilize the global financial safety net.

### Concluding assessment
- The IMF must emphasize and protect its unique role as a multilateral conditional lender and truth teller on debt and monetary issues.
- "Greater operational independence is the prerequisite for addressing any and all of the other global economic challenges as geopolitics corrodes globalization."
- If the IMF secures operational insulation and enforces consistent, technocratic surveillance and lending practices, it can be "a bulwark of technocratic multilateralism against politicized bullying in financial and other market access."

*Source: Adam S. Posen, "An IMF for Tomorrow," JUNE 2024*

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_Source: https://www.imf.org/-/media/files/publications/fandd/article/2024/06/posen.pdf_