The economic and financial crisis of the past two years has placed in high relief profound changes in global economic and financial realities. Most notably, the crisis has underscored the shift in relative economic weight in favor of dynamic emerging market economies. In response, the G-20— a grouping that includes both advanced and large emerging economies—has stepped forward as the premier political venue for addressing economic and financial policy challenges.
These changes are exerting significant influence on the evolution of global governance, and they directly involve the IMF in two concrete ways. First, new advances are taking place in multilateral economic policy cooperation, with Fund participation. Second, realignment of Fund governance has been put on a fast track, with delivery scheduled for January 2011.
A striking initiative adopted by the G-20 Leaders at their Pittsburgh Summit was the promulgation of a Framework for Strong, Sustainable and Balanced Growth, and the creation of a mutual assessment process to implement the Framework. The Framework process represents an innovative means of preserving the unprecedented policy collaboration that developed over the past year as the crisis unfolded. Underpinning the Framework initiative is the generally shared conviction that the unprecedented strength and coherence of the expansionary fiscal and monetary policy measures implemented after September 2008 was critical in arresting and eventually reversing the 2008/2009 global recession.
Multilateral dialogue
At the heart of the Framework process is the sharing of members’ medium-term policy plans and outlooks in a format that will promote an effective multilateral dialogue. The overarching goal is the development of a coherent set of economic policies that will best support strong, sustainable, and balanced growth. The initial target is to prepare a detailed issues and options report for the November 2010 Leaders’ Summit in Korea.
The IMF has been asked to play a key supporting role in the Framework process. The Fund is helping to combine the G-20 members’ economic forecasts and policy plans in order to highlight global prospects and potential challenges. In addition, Fund staff will provide analytical support to the G-20 authorities’ examination of the likely impact of potential policy initiatives. Moreover, the Fund is helping to incorporate the inputs from other international organizations and institutions into the Framework deliberations.
In 2006/2007, the IMF convened the “Multilateral Consultations on Global Imbalances” with the particiation of China, the Euro area, Japan, Saudi Arabia, and the United States. The goal was to develop a set of economic policies that would benefit each individual participant, as well as promote the mutual goals of sustaining global growth while reducing international payment imbalances.
In fact, the set of individual policy undertakings offered by each of the participants, and that were presented at the Fund’s International Monetary and Financial Committee (IMFC) meeting in April 2007, were widely viewed as appropriate. However, the exercise failied to bring about sufficient concrete policy action by members to avoid the building crisis. Perhaps the Consultations were viewed as a Fund-conceived and Fund-led initiative, and the participants may have felt insufficient commitment to the effort’s success. Of course, even though it was agreed that the policy plans were in each participant’s interest, that didn’t mean that the policy actions were politically popular.
Policy collaboration
Hopefully, one positive outcome of the crisis may prove to be that the value of economic policy collaboration has been demonstrated clearly. Thus, the potential benefits from the Framework approach may seem more convincing than was the case in 2007. Moreover, the Framework process reflects an unprecedented commitment from the political leaders of the G-20 countries, representing about 90 percent of global GNP and two-thirds of the world’s population.
Turning to IMF Governance, the IMFC, meeting at the Fund’s October 2009 Annual Meetings in Istanbul, endorsed the G-20 proposal to shift quota shares toward dynamic emerging market and developing countries by at least 5 percent by shifting shares from over-represented to under-represented countries. This move is to be in addition to the changes agreed under the 2008 Quota and Voice Reforms. The 14th General Quota Review is under way, and is expected to be completed by January 2011 (two years earlier than the formal deadline). The Review will consider two broad issues—the overall adequacy of Fund quotas and the distribution of quotas.
Success in this effort will represent a milestone in the reform of IMF governance, as it would eliminate any significant misalignment in quota shares relative to measures of relative economic weight. This will go a long way to eliminating the basis for disputing the legitimacy of the Fund’s decision-making process. This should enhance the IMF’s effectiveness, for example in helping to represent the views of the nearly 170 Fund member countries that are not a member of the G-20.
The review of the overall size of the Fund's quotas should better align the Fund's resources with the tasks facing the institution. The effort required to contain the financial crisis has been instructive. In this context, the Fund already is examining its prospective role, with a focus on how it can help to strengthen systemic stability. The success of the Fund's innovative Flexible Credit Line has demonstrated the relevance of precautionary, insurance-like facilities, and the Fund is studying how it might further improve its crisis-prevention capability. Moreover, the Fund intends to improve its focus on multilateral and financial sector surveillance, with the goal of bolstering its contribution to systemic stability.
