Efficiency and Legitimacy: Trade-Offs in IMF Governance

IMF Working Papers, June 1, 2005

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Designing appropriate governance structures for an international financial institution such as the IMF is difficult, because steps to enhance the legitimacy of such an institution through constraints on its decision-making process may affect its operational efficiency.
Potential trade-offs between legitimacy and efficiency exist for any public institution but are arguably more severe for an international one, because delegating power to it [is] politically controversial and, thus, likely to imply tighter constraints.
The trade-offs are not absolute: they depend on the specific ways in which legitimacy is pursued—that is, on the specific constraints that are set.
Strategic reforms should aim at improving the terms of the trade-off by exploring steps that are Pareto-improving in the dimensions of legitimacy and efficiency.

Constraints introduced to enhance legitimacy can reduce operational efficiency.
The severity of trade-offs is amplified for international institutions due to the political controversy of delegating power.
The nature and design of constraints determine whether trade-offs are strict or can be mitigated.

Seek reforms that improve the terms of the trade-off between legitimacy and efficiency.
Prioritize reforms that are Pareto-improving across legitimacy and efficiency dimensions.
Focus on the specific mechanisms and constraints through which legitimacy is pursued, as different constraints have different efficiency impacts.