Finally, the Western alliance itself is fraying. Donald Trump’s administration had serious trade differences with Canada and western Europe, and it is not unthinkable that as the political makeup of governments changes, there will be less and less consensus in the alliance on economic direction. This could result in unpredictable decision making if the alliance still controls the IMF.
Quotas and oversight
If the Western alliance cannot be relied on to continue providing good governance, the case for redistributing IMF quotas based on the relative size of economies becomes even more important. But it also may have unintended consequences. As geopolitical differences fragment the world, could a hypothetical China-centered alliance, for example, block loans to countries tied closely to the Western alliance, or vice versa? Isn’t dysfunctional governance better than absolute paralysis?
It might be, which is why a change in IMF governance should accompany quota reform: the executive board should no longer vote on every operational decision, including every lending program. Instead, independent professional management should make operational decisions for the benefit of the global economy. Board members should set broad objectives and periodically examine whether they are being met, perhaps with the help of the Independent Evaluation Office. In other words, the executive directors should focus on governance, much as corporate board directors do. They should set operational mandates, appoint and change management, and monitor overall performance, leaving day-to-day decisions to management.
In short, the way to avoid paralysis is to professionalize decision making and depoliticize it. When the IMF was established, John Maynard Keynes, fearing the undue influence of the United States, wanted a nonresident board. In the immediate postwar period, when long-distance communications were costly and travel, largely by steamship, took time, this implied a non-executive board and empowered management. Keynes was overruled by Harry Dexter White, the US negotiator at Bretton Woods. It is time to reexamine Keynes’s idea, but given the improvements in communication and travel, to explicitly require that the nonresident board be decidedly nonoperational.
The board would select top IMF officials based on which candidates enjoy the broadest consensus, rather than giving certain countries or regions the right to appoint. Such a process would be unavoidably political, but as long as the board sets some basic qualifications for appointees, politicking will help forge consensus behind candidates, ensuring they can function effectively.
New versus old
The political impediments to dramatic IMF reform are sizable, including dominant members unwilling to cede power if they see it as potentially signaling political weakness domestically. It is far easier for member countries to take incremental steps, such as the recent quota review, and tell themselves that this is progress. Tough decisions can be kicked down the road to the next government and inevitably postponed again. If this is how the future evolves, the organization will carry on, but will be less legitimate and relevant to the world’s needs. The IMF will still be of value to developing economies but will have much less influence when it comes to helping the global economy adapt.
If quotas do shift to reflect economic strength without any other change in governance, China may eventually have the largest quota. Then, under the IMF’s Articles of Agreement, IMF headquarters would have to move to Beijing. The politicization Keynes feared would continue, but potentially with a new set of political players and rules and a new set of dissatisfied and disengaged countries.
If, however, members reform quotas and governance simultaneously, an independent IMF could bring a fragmenting world together on key issues. To be palatable to the rest, such comprehensive reforms should happen soon, else the rest could well believe this is an attempt by the Western alliance to hold on to some influence just when power is finally shifting.
A reformed IMF could help determine new rules for international exchange, for instance by setting out a preliminary list of issues to be negotiated, taking the changes in the world economy into account. Given the complexity of the issues, it could bring together a small set of countries to do the initial negotiations under its multilateral consultations framework. If the IMF gains sufficient broad trust, it could shape these new rules and enforce their implementation. And it could sharpen its analysis and better advise countries on macroeconomic and external sustainability while lending more effectively to set countries back on track.
Eighty years after Bretton Woods, the world must decide whether to reform the IMF to better engage with members and address their challenges—or fail to act and let the Fund fade away.
