## Press Release: Statement by Agustín Carstens to IMF Executive Board

_IMF News, June 21, 2011_

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**Canonical URL:** [Press Release: Statement by Agustín Carstens to IMF Executive Board](https://www.imf.org/en/news/articles/2015/09/14/01/49/pr11246)

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## Bibliographic details
- Published: June 21, 2011

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### 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](https://www.imf.org/en/news/searchnews)
- [Statement by Christine Lagarde to the IMF Executive Board](https://www.imf.org/external/np/sec/pr/2011/pr11253.htm)
- [Managing Director Selection Process](https://www.imf.org/external/np/exr/facts/mdsp.htm)
- [MD Selection](https://www.imf.org/external/np/exr/faq/mdselection.htm)
- [PRESS CENTER](http://presscenter.imf.org/)
- [https://www.imf.org/en/home](https://www.imf.org/en/home)

_Source: https://www.imf.org/en/news/articles/2015/09/14/01/49/pr11246_