Press Release: Statement by Agustín Carstens to IMF Executive Board

IMF News, June 21, 2011

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Bibliographic details

• Published: June 21, 2011

Overview

• Press Release No. 11/246
• Date: June 21, 2011
• Speaker: Mr. Agustín Carstens, candidate for the position of the Managing Director of the International Monetary Fund (IMF), addressing the IMF Executive Board.
• Core message: The IMF remains essential but faces four "fundamental weaknesses" that the next Managing Director must address: Governance; Crisis Prevention (surveillance); Crisis Resolution; and Policy Coordination.

Governance (First Fundamental Weakness)

• Framing:
  • The Fund’s main deliverables are policy recommendations (from surveillance and technical assistance) and lending programs tied to conditionality on macroeconomic policies.
  • Effectiveness is tied to legitimacy: the Fund must be perceived as unbiased, apolitical, evenhanded, and with balanced country voice and representation.
• Identified governance shortfalls:
  • Reforms have been "timid" and risk the Fund’s effectiveness.
• Priority areas for attention:
  • Underrepresentation of emerging market countries and developing countries:
  • Increase the number of Executive Board chairs they hold.
  • Ensure adequate and merit-based participation at all levels of staff and management.
  • Quota redistribution in favor of emerging and developing countries:
  • Voting power must appropriately take into account members’ relative economic weights.
  • Use objective criteria to underpin the formula for calculating quotas.
  • Implement periodic and automatic adjustments.
  • Address regional overrepresentation.
  • Selection of management:
  • Deliver on G-20 and IMFC consensus (at least since 2005) that the MD selection process should be transparent, fair, merit-based, and independent of nationality.
• Role expectations for the MD:
  • Serve all membership and act as guardian of evenhandedness and cooperative nature of the institution.
  • Provide intellectual leadership and build respectful relationships for constructive collaboration.
• Accountability note:
  • Increased representation requires increased accountability; emerging market countries must fully share responsibility for promoting broad-based prosperity.

Crisis Prevention / Surveillance (Second Fundamental Weakness)

• Assessment:
  • The Fund "failed profoundly" in anticipating the recent financial crisis.
  • Contributing factors include insufficient surveillance resources, incomplete understanding of financial sector issues, and lack of evenhandedness (advanced economy surveillance was relatively light).
  • Surveillance is ineffective if authorities do not take it seriously.
• Required actions to strengthen surveillance:

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. Rebalance financial sector focus: allocate adequate resources and improve coordination with BIS, the FSB, and IOSCO.

• Balance to strike:
  • Be a trusted advisor and partner to authorities while avoiding becoming hostage to the membership.

Crisis Resolution (Third Fundamental Weakness)

• Assessment:
  • Even with adequate surveillance, countries will encounter crises; the Fund must minimize adjustment costs.
  • Recent increases in financial resources are positive but insufficient.
• Key requirements:
  • Adjustment of quota size: quota resources have not kept pace with global growth, the size of world financial markets, or degrees of interconnectedness.
  • Further development of lending instruments; encourage the use of preventive facilities (e.g., Flexible Credit Line (FCL) success).
  • Tailoring of Low Income Countries (LIC) facilities to heterogeneous shocks.
  • The Fund should not be the sole lender of last resort; complement lending with regional arrangements and central bank swap lines (the Fund should not coordinate these arrangements).
• Program design priorities:
  • Balance availability and scale of IMF financing, domestic policy adjustment, and support from other stakeholders.
  • Consider implications of a country crisis for international stability: nature of the crisis and sustainability of debt are critical.
  • Rule of thumb:
  • If driven by high liquidity constraints, the Fund should lend, including in large amounts.
  • If debt position is unsustainable, Fund lending would overburden the member and postpone more effective decisions; pre-emptive restructuring agreements can help restore debt sustainability and enable Fund support.
  • Acknowledge "gray zone" cases: lending involves judgment calls and considerable risks; weigh costs of not supporting a member in crisis.

Policy Coordination (Fourth Fundamental Weakness)

• Identified global challenges requiring coordination:
  • 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.
  • The crisis in Europe and economic transformation in the Middle East and North Africa.
• Role for the Fund:
  • The Fund is uniquely placed to entice cooperative solutions; international policy coordination is essential but difficult.
  • Two avenues to pursue:
  • Strong coordination with the G20 and the FSB.
  • Transform the IMFC from a "quasi-ceremonial" event to a more substantive policy discussion meeting, with Fund technical work as the basis.
  • Integration:
  • Going forward, the G20 political process needs to be integrated into the Fund’s governance structure.
• Legitimacy linkage:
  • International financial institutions and national governments will be more receptive and willing to cooperate with the Fund if the institution’s legitimacy is enhanced.

Conclusion and Policy Imperatives

• Core conclusion:
  • Without an effective Fund, localized crises risk spreading, causing broader suffering; the Fund can avert and resolve crises if it addresses its weaknesses.
• Four areas to strengthen:
  • Legitimate governing structure (governance reforms, quota redistribution, transparent MD selection).
  • Substantially improved surveillance and crisis prevention capabilities (more staff, financial expertise, management guidance, and institutional willingness to challenge conventional wisdom).
  • Enhanced crisis resolution capacity (adequate quota resources, tailored lending instruments, prudent program design, use of regional arrangements and swap lines).
  • Improved policy coordination (strong G20 and FSB coordination; substantive IMFC deliberations; integration of G20 into governance).
• Leadership requirement:
  • The Fund needs an MD who can provide strategic direction and send a signal that the institution is "one step ahead of global developments" to continue serving all members.

Source: Press Release: Statement by Agustín Carstens to IMF Executive Board (June 21, 2011).

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References

• Press Releases
• Statement by Christine Lagarde to the IMF Executive Board
• Managing Director Selection Process
• MD Selection
• PRESS CENTER
• https://www.imf.org/en/home