## Reform or Risk Irrelevance

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### Legitimacy of the IMF
- The IMF was established when the United States was the only superpower and could act as a credible, mostly impartial enforcer of rules governing exchange.
- The Western alliance (United States, Canada, and western Europe) historically controlled managerial appointments and operational decisions.
- This Western control has been challenged recently by China’s rise as it becomes both an economic and military superpower.
- Political shifts within the Western alliance threaten consensus and could lead to unpredictable decision making if that alliance continues to control the IMF.
- The IMF needs perceived legitimacy and good governance to:
  - Facilitate negotiation of rules and enforce those rules impartially.
  - Decide how to deploy its resources correctly.

### Quotas, representation, and consequences
- IMF member quotas represent voting rights and the amount of capital subscription payment to the Fund; maximum borrowing is proportional to quota.
- Specific quota comparisons preserved from the source:
  - Japan’s 6.47 percent quota exceeds China’s 6.4 percent.
- India’s quota is less than those of the United Kingdom and France despite India’s economy having overtaken both in size (no numeric quota given in source).
- Political dynamics and shrinking fiscal space in the United States have moved policy toward greater isolationism; the United States has “moved steadily from being the referee to becoming a player, wanting openness on its own terms.”
- With fiscal capacity tight globally, the IMF increasingly must lend without additional support from the Western alliance, raising risks that Fund resources could be used to help political allies even when lending is not economically viable.
- Potential IMF loan losses are not visible on government books in the short run and are borne by members proportional to their quota shares, creating incentives for political use of IMF resources.

### Governance reform: professionalize and depoliticize
- The current executive board structure, which votes on every operational decision including every lending program, should change:
  - Propose that independent professional management make operational decisions for the benefit of the global economy.
  - Executive board members should set broad objectives, appoint and change management, and monitor overall performance—focusing on governance rather than day-to-day operations.
  - The board could use the Independent Evaluation Office to examine whether objectives are being met.
- Historical institutional design note:
  - John Maynard Keynes advocated for a nonresident (non-executive) board to limit undue influence, but Harry Dexter White’s approach prevailed at Bretton Woods.
  - Given modern communication and travel improvements, revisiting Keynes’s idea to explicitly require a decidedly nonoperational nonresident board is recommended.
- Top IMF officials should be selected by the board based on the broadest consensus rather than giving certain countries or regions appointment rights; the process will be political but can forge consensus if basic qualifications are set.

### Risks of partial reform and geopolitical shifts
- Incremental quota changes without governance reform risk:
  - China eventually having the largest quota, which under the IMF’s Articles of Agreement would require IMF headquarters to move to Beijing.
  - Continued politicization and a new set of dissatisfied and disengaged countries.
- If governance and quota reforms happen simultaneously and soon, a reformed IMF could:
  - Bring together fragmenting countries on key issues.
  - Set out a preliminary list of issues for negotiation and bring a small set of countries together under its multilateral consultations framework.
  - Shape and enforce new rules for international exchange, and sharpen analysis to better advise countries on macroeconomic and external sustainability while lending more effectively to set countries back on track.

### Policy recommendations and scenarios
- Recommendation: Redistribute quotas to reflect the relative size of economies while simultaneously reforming governance to avoid paralysis or politicization.
- Recommendation: Move operational decisionmaking to independent professional management; have the executive board focus on governance, mandates, appointments, and overall monitoring.
- Scenario: If comprehensive reforms are delayed, the IMF will remain valuable to developing economies but will be less legitimate and less relevant in helping the global economy adapt.
- Scenario: If members reform quotas and governance simultaneously and promptly, the IMF could regain broad trust and play a central role in negotiating and enforcing updated rules for international exchange.

*Source: “Reform or Risk Irrelevance,” Raghuram Rajan, F&D, JUNE 2024*

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