(Version in Español)
The year 2010 was—finally—the year of IMF reform. Dominique Strauss-Kahn, the IMF’s Managing Director, did not exaggerate when he asserted that the agreements of 2010 were “the most important reform in the governance of the institution since its creation.” What will happen now, and why is it so important?
Three major changes have been agreed to. Each one is a major reform and the culmination of years of work. Each one will be difficult to make effective. Each one should prove to be a blessing, but only if it is well implemented.
First, the fast-growing emerging market countries will have a bigger say in how the institution is run and how it interacts with its membership. For the first time, the combined voting power of the United States and the current European Union members will fall below 50 percent.
Although largely symbolic, this transition has the potential to change the culture of the institution. Because the reform also looks forward so that future changes in countries’ growth rates can be incorporated every few years, it overcomes at least some of the inertia that has tethered the IMF to the past. Asia and Latin America will gain in influence in the short term, and Africa can be accommodated as its economic performance continues to improve. Advanced European countries will have fewer seats on the Executive Board but will have the opportunity to consolidate their positions and become more effective as a group.
These changes will be difficult to complete because they require sensitive political commitments by several countries. Whether they will improve the policies and decisions of the Fund depends on how the emerging markets—countries that are still developing their roles in the international economy—choose to use their new influence and how receptive the traditional powers prove to be.
Second, the institution has become much more flexible in the way it lends money. When the IMF made its first loans in 1947, it had just one technique: an immediate currency swap (the borrower’s domestic currency exchanged for a convertible currency, usually U.S. dollars). It gradually expanded the repertory to include stand-by arrangements, extended (larger and longer term) arrangements, more favorable terms for loans to cover commodity price shocks or loans to low-income countries, and other special-use facilities.
At the end of the 1990s, the Fund had at least ten lending facilities, but all of those that were in active use required the borrower to undertake a detailed program of macroeconomic and structural reforms. Recently, however, after many years of failed attempts, the IMF has succeeded in setting up lending facilities that are more suitable for countries with good track records and solid commitments to implement good policies on their own.
The goals of this reform are to improve the Fund’s ability to avert financial crises and to respond more flexibly to borrowers’ needs. The new facilities may also help reduce the stigma that has long been associated with asking the IMF for support. The main challenge will be to ensure that borrowers do carry out strong policies, put their financing difficulties behind them, and repay the loans when they fall due. Past efforts by the Fund to be more flexible failed in part because weak loan conditions often were followed by weak national economic policies, and in part because the conditions were still considered to be stigmatic. Finding the right balance between discipline and flexibility is bound to be an ongoing test.
Third, the general financial resources of the IMF, which usually have been quite scarce in relation to member countries’ financing needs, are to be doubled. That increase, however, is to be matched by a rollback in the Fund’s standing borrowing arrangements. The main immediate effect of this reform, therefore, will not be to increase the amount that the IMF can lend, but rather to reduce the need for the Fund to borrow from creditor countries to finance large lending operations. The challenge in coming years will be to ensure that the IMF’s resources are adequate, are used well, and do not become a substitute for the difficult policy reforms that can be made only when manifestly necessary.
The reforms of 2010 will not be the end of the road. One major ongoing effort is for any future competition for the leadership of the IMF to become more open. All of the Fund’s ten Managing Directors have been European. All eight of the Deputy Managing Directors (First Deputies since 1994) have been from the United States. For the past decade, while non-European candidates for Managing Director have been nominated but ultimately rejected, pressure has been intense for the selection process to be open fully to all candidates without regard to geography.
The IMF’s Executive Board, which selects the Managing Director, agreed in principle several years ago to open up the process, but winning higher political support for the reform has not been easy. If I had a crystal ball, however, I believe that it would show that important progressions such as this will take place; that the IMF of the next decade will continue to evolve to reflect the rapid and major transformations in the world economy.