Press Release: Statement by Agustín Carstens to IMF Executive Board

June 21, 2011

Press Release No. 11/246
June 21, 2011

Mr. Agustín Carstens, a candidate for the position of the Managing Director of the International Monetary Fund (IMF), made the following statement to the IMF Executive Board on June 21, 2011:

Ladies and Gentlemen, Members of the Board:

At the start of the process for selecting the Managing Director I sent you a statement in which I listed the merits and abilities that I believe give me the necessary experience to effectively lead this unique and essential institution. I now welcome the opportunity to address you in person after having had the privilege of meeting with many of your authorities during the past three weeks.

Sixty-five years after its founding, the IMF remains an essential and unrivaled multilateral institution. The Fund’s surveillance, technical assistance, and standards setting have made invaluable contributions to policy design and management. Fund staff, the best technical body in its field, has provided effective policy advice and economic guidance. Through its unique lending facilities, the Fund has played a leading role in the resolution of several crises. Its contribution to institution building in low income countries has laid the foundations for prosperity and diminished inequality.

In its response to the current economic crisis, the IMF enhanced its stature by providing much needed financial support and policy advice to a large number of its membership. It achieved this through efficient coordination with the G20 and the Financial Stability Board (FSB); a substantial increase in its financial resources; and a revamped global financial safety net of innovative crisis resolution and crisis prevention instruments.

Despite these achievements, the IMF is not all it could be. In particular, the Fund’s institutional development has lagged behind global developments. The next Managing Director will need to address four remaining fundamental weaknesses: Governance; the ability to perform appropriate surveillance (both at the national and multilateral levels) and prevent crises; the capacity to effectively support crisis resolution; and, finally, the competence to induce policy coordination at the global level. Failure to address these issues risks diminishing the IMF’s relevance and alienating its membership.

First Fundamental Weakness: Governance

The main “deliverables” of the IMF as an institution are its policy recommendations, derived from surveillance and technical assistance, and its lending programs, usually tied to conditionality on macroeconomic policies. Another way of looking at this is that, at the end of the day, the main mission of the Fund is to support its members when they need to take tough policy decisions.

The corollary to this way of framing the Fund’s mission is that its effectiveness is intrinsically tied to its legitimacy. For its policy recommendations to be heard, accepted and implemented, it is vital that the Fund be perceived as unbiased and apolitical. By unbiased I mean that evenhandedness among members prevails; that there are no regional biases; and that country voice and representation are well balanced. Also, while recognizing that it operates in a political environment, the Fund must not be bound by political constraints.

Although recent progress has been made, governance reforms have been timid, and this has put the Fund’s effectiveness at risk.

There are three areas of governance where I believe particular attention should be paid:

First, addressing the underrepresentation of emerging market countries and developing countries. This includes increasing the number of Executive Board chairs they hold and ensuring their adequate and merit-based participation at all levels of staff and management. Emerging market countries have been reliable partners during the last decade. Adequate voice and representation would ensure that their vast policymaking experience benefits the global community.

Second, quota redistribution must continue in favor of emerging and developing countries. Consensus building is at the heart of the Fund’s decision-making process, but for it to function, initial conditions for all countries must be fair. By this, I mean that voting power must appropriately take into account members’ relative economic weights. Objective criteria need to underpin the formula used to calculate quotas; periodic and automatic adjustments must be built into the process; and regional overrepresentation should be addressed.

To be sure, increased representation comes with increased accountability. Emerging market countries would have to fully share responsibility for promoting broad-based prosperity in the global economy.

The third aspect of governance that remains to be resolved is in the selection of management. There has been consensus at the G-20 and at the International Monetary and Finance Committee (IMFC) for several years (at least since 2005) that the MD selection process should be transparent, fair, merit-based, and independent of nationality. It is high time we deliver on this agreement.

In my academic and policy making career, including my direct involvement in diverse crisis resolution episodes, I have acquired the credentials and the skills necessary to effectively lead this institution. My tenures as Executive Director, Deputy Managing Director, and country authority have provided me with an intimate and well-rounded knowledge of the Fund. I have the capacity to provide intellectual leadership for the institution. Based on my experience, I believe the most effective leadership requires not only a well-articulated vision, but building and nurturing respectful relationships as the basis for creative and constructive collaboration.

I would be an MD dedicated to serving all the membership, and I would consider my main responsibility to serve as guardian of evenhandedness and of the cooperative nature of the institution, for these are the foundation for its survival and effectiveness.

Second Fundamental Weakness: Crisis Prevention

The Fund failed profoundly in anticipating the recent financial crisis. Several factors are behind this. Insufficient resources devoted to surveillance and an incomplete understanding of financial sector issues most assuredly played a part. Lack of evenhandedness is also to blame: advanced economy surveillance was relatively light compared to that of other countries. This made advanced countries less interested in Fund surveillance, which, in turn, further discouraged staff from challenging the conventional wisdom. In the end, surveillance is useless when authorities do not take it seriously.

To strengthen surveillance, I believe the following are required:

  • 1. Strong and engaged guidance from management.

    2. More staff dedicated to surveillance, including more financial experts.

    3. More intense and inquisitive surveillance. The Fund should second-guess conventional wisdom and authorities.

    4. Staff and management should take more risks in their assessments; the Executive Board should be open to this.

    5. Resist the emerging markets bias: these economies are no longer the “weakest link”.

    6. In financial sector issues it is clear that regulation and supervision by authorities (including surveillance by the Fund) lagged behind innovation in financial markets. Rebalancing needs to take place, including adequate resource allocation and better coordination with other institutions such as the Bank for International Settlements (BIS), the FSB, and the International Organization of Securities Commissions (IOSCO).

To strike the right balance on surveillance, the Fund should be perceived by authorities as a trusted advisor and partner, while at the same time it should not end up becoming hostage of the membership.

Third Fundamental Weakness: Crisis Resolution

Even under adequate Fund surveillance, countries will fall into trouble. While this is inevitable, the Fund has the ability and the responsibility to minimize the costs associated with the resulting adjustment. The Fund’s financial resources and lending toolkit, its ability to partner up with regional bodies, and its program design, must all be up to this task.

Even though financial resources available to the Fund to support member countries have been recently increased, more needs to be done. Adjustment of quota size is of the essence. Quota resources have not kept pace with the rate of global growth, the size of world financial markets, or the degree of countries’ interconnectedness. Further development of lending instruments must also continue. The success of the Flexible Credit Line (FCL) indicates that the use of preventive facilities should be encouraged. Taking into account the heterogeneous nature of shocks, further tailoring of Low Income Countries (LIC) facilities is also warranted.

The role of lender of last resort should not rest exclusively on the Fund. The IMF should complement its lending capacity with other options, including regional arrangements and central bank swap lines (although the Fund should not play a coordinating role in these arrangements).

Appropriate program design is just as crucial as having the available resources to back a program. As the global economy becomes more complex, Fund programs will increasingly face new and more difficult circumstances. They will have to achieve the appropriate balance between availability and scale of IMF financing, domestic policy adjustment, and support from other stakeholders.

The Fund must also consider the implications that a country in crisis may have on the stability of the international system. Critical elements to take into account include the nature of the crisis and the sustainability of debt. As a rule of thumb, if the problem is driven by high liquidity constraints, the Fund should lend, including in large amounts. If, on the other hand, the debt position is unsustainable, Fund lending would only overburden the member, and would lead to the postponement of other, more effective, decisions. Under these circumstances, pre-emptive restructuring agreements can help countries regain debt sustainability and Fund support.

There are, of course, “gray zone” cases. Lending is usually based on judgment calls and, therefore, involves considerable risks. The Institution needs to be mindful of the costs of not supporting a member in crisis.

Fourth Fundamental Weakness: Policy Coordination

The IMF is at the center of an international financial system that faces a long list of significant challenges. These include the persistence of global imbalances; spillover effects from major economies’ policy decisions; capital flows to emerging market economies; macro prudential measures, including reserve accumulation and capital controls; commodity price increases; financial sector reforms; fiscal sustainability in advanced economies; and the crisis in Europe and economic transformation in the Middle East and North Africa.

These global problems require global solutions. International policy coordination is essential, but extremely difficult to engineer. The Fund, however, is uniquely placed to entice cooperative solutions. Two avenues that it must follow are a strong coordination with the G20 and the FSB and transforming the IMFC from a “quasi-ceremonial” event to a more substantive policy discussion meeting. Fund technical work should form the basis of both of these transformations. Going forward, the G20 political process needs to be integrated into the Fund’s governance structure.

Let me stress that I truly believe that international financial institutions and national governments will be more receptive and willing to cooperate with the Fund if the legitimacy of the institution is enhanced.


Without an effective Fund, the world economy risks localized crises spreading to broader areas, with all the suffering this implies. The Fund is a unique institution that can provide the capacity and credibility to avert crises and resolve them when they occur. To deliver on this, it needs a legitimate governing structure, substantially improved surveillance and crisis prevention and resolution capabilities, and enhanced policy coordination.

At this crucial moment, the Fund needs an MD who can provide strategic direction to the institution. It is vital that the Fund send the strongest signal that, by virtue of its leadership, it is not lagging behind, but one step ahead of global developments, so that it may continue to flourish in serving all of its members.

Thank you for your consideration of my candidacy.

Agustín Carstens


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