Argentina and the IMF
Mexico and the IMF
Thailand and the IMF
IMF Quotas -- A Factsheet
Proposals for a Sovereign Debt Restructuring Mechanism (SDRM) -- A Factsheet
IMF Surveillance -- A Factsheet
Free Email Notification
Some Challenges Confronting the IMF
Many challenges confront the IMF at the current juncture of the world economy. I will concentrate in these remarks on just a few among the many that I believe are critical to its future direction.
The Fund is a constantly changing organization, partly because it must continue to adapt to the ongoing changes in global political, economic, and financial realities, and partly because the major countries often turn to the Fund when they want something done in the international community. The Fund has been responsive to such requests in the past and that success tends to invite new requests.
In recent years, the Fund has concentrated increasingly on crisis prevention and has refined its tools and analysis for that work. It has created new lending facilities for its members, and closed down facilities that found little or no demand. It has transformed itself from something approaching a secret society to an exceptionally transparent institution. It has changed its staffing and structure to reflect changes in the world economy and in markets. It has vastly expanded its technical assistance and training. And it has taken on a number of new responsibilities—some of which, however, represent a mixed blessing!
Notwithstanding all the changes in the Fund in the last 10 years, important issues remain that will decide the role and the effectiveness of the institution in the future. It's probably too often said of one institution or another that it is at a "critical juncture", but I believe that that is indeed the case for the Fund. And as citizens of an increasingly integrated—and, perhaps, increasingly fragile—world, and as players in financial markets, what happens to the Fund should be of concern to all of you.
I will briefly lay out issues in four areas:
1. the governance of the Fund;
2. Fund Surveillance;
3. the Fund's activities with its emerging market member countries; and
4. the role of the Fund in capital markets.2
First, on governance. There are many dimensions to the issue of governance in the Fund, but I'll concentrate on only one: the voice and vote of member countries. For those of you who may not know the structure of the Fund, it is essentially governed on an ongoing basis by a permanent, resident Executive Board of 24 chairs.
- Eight countries have their own chairs, and appoint their own Executive Directors.
- The other 176 member countries come together in constituencies or country groupings of various size, each with an Executive Director elected by the constituency. Some constituencies are relatively small, like that comprising India, Bhutan, Bangladesh and Sri Lanka; and some are quite large, like the two African constituencies with 19 and 24 countries, respectively.
The vote of a country on decisions taken within the Fund is based primarily on its quota—intended as a financial measure of the country's place in the world economy.3 Quotas also determine access to the financial resources of the Fund and the drawing power of the Fund against what are essentially lines of credit from members with strong balance of payments positions to provide that financing. But a good case can be made that Fund quotas have not kept pace with changes in the global economy. This is true in two respects:
- First, in the aggregate. If Fund quotas were the same size today relative to the output of member countries as they were when the IMF was first established, they would be more than three times larger in total than they are; if the Fund's size had been maintained relative to the volume of world trade, it would be more than nine times its current size; and if quotas had been increased at pace with capital flows—a source of the major recent crises that the Fund was asked to help finance—it would be far, far larger.
- But there is also a problem as regards the relative size of member country quotas. Let me give some examples of how representation has become quite distorted:
- Europe, defined as the EU and excluding Russia, has three full chairs and the lead position or participation in at least six others;
- the EU 15 have almost 32% of the vote (the U.S. has 17%);
- Mexico, with more than three times the share of world GDP (in PPP terms) and nine times the population of Belgium, has about half its quota;
- The seven largest Asian countries (other than Japan) compared with seven European countries—Austria, Belgium, Denmark, Finland, Norway, Sweden and Switzerland—have seven times the share of world GDP and vastly larger trade, but smaller aggregate quotas.
I am not making an argument for any particular quota formula, although I believe it would be best to base quotas primarily on members' participation in trade and financial flows. But, whatever the basis, surely something is askew and needs correction. The legitimacy of the Fund's decision-making in the eyes of the membership and the general public can only be tarnished by such distortions; and without legitimacy and the perception of legitimacy, the Fund's effectiveness can only be reduced.
Reforming the way the EU's aggregate quota is calculated would provide some room for increasing the quotas of some of today's more egregiously under-represented member countries. For example, excluding intra-EU Trade, i.e., treating it like a country, which economically and financially it is rapidly becoming, would reduce the quotas of the EU-15 from about 30 percent to less than 23 percent.
There should probably also be a reduction in the number of chairs on the Executive Board to improve the efficiency with which the institution works. Again, dealing with the over-representation of the European countries would help. Putting the EU's 25 members in one or two chairs would significantly reduce the total number of chairs. Beyond this, it would probably be useful to take the total size of the Executive Board down even a bit further and, at the same time, to upgrade the seniority of Directors elected or appointed to the Executive Board.
I'm not suggesting that making such changes would be easy. The draft EU constitution seems to permit a consolidation of representation. But the language is vague and it is unclear whether the EU itself, or a body representative of the euro area countries, could become the representative unit in the Fund or if the representation would remain as constituencies of the individual countries. The Fund is a country-based organization, but some argue that, for purposes of the Fund's Articles, the European community, or at least the euro area countries, have assumed the characteristics of a "country" and should have a single membership and a single chair in the executive board. Others are not so sure. Moreover, there are devilishly difficult issues regarding how this would affect the membership of individual European countries in their relations with the various G's—the G-7, G-20, etc.—that have a voice—sometimes a predominant voice—in governing the global economic and financial system. So it surely won't be easy! But I believe Europe should deal with this issue and come up with a proposal that could serve as the basis for beginning a genuine discussion about reforming the Fund's governance structure. Short of a proposal from the Europeans, it is difficult to see how this process will begin.
Let me turn now to the most important of the IMF's responsibilities, surveillance. This remains a little understood responsibility of the Fund and of its members, visible in too many countries only to a narrow group of officials that deal with Fund matters. Maybe greater transparency will help—most of you probably see country reports by the Fund staff on a regular basis; but so far its impact is somewhat limited. The Fund is recognized as having staff that is fully capable of doing first rate work in this area, but there remain basic questions as to its purpose, its audience, and its effectiveness.
In the first instance, the purpose is, of course, to determine if each member is respecting its responsibilities under Article IV of the Articles of Agreement with regard to its exchange rate policies. We all know the breadth of policies this, in fact, encompasses. But the Fund is also expected to advise and assist its members through surveillance. This raises the question of what staff and the Executive Board bring to the exercise. Certainly, staff must bring a different perspective than that of most policy makers, who are often predominantly focused on domestic issues. Prospects for the world economy and the region, and the impact of those developments on a country and its own impact back to the region and the world, should be a particular talent of Fund staff. This becomes absolutely key as the world is increasingly integrated and connected.
Beyond this, we hear repeatedly that in addition to the macroeconomic assessment that is the stock-in trade of surveillance, country officials want Fund staff to bring the experience of other countries to the problems they are currently confronting. Policy makers in any country seldom face problems that have not been confronted—at least in their essence, if not in their specifics—in other countries.
But to be better able to share experiences and lessons across the membership, the Fund needs to better distil the extraordinarily broad experience of its members and make sure staff is conversant with those lessons. Some of this is done and done well!4 However, I believe more could be done to assure that the Fund is the real centre of knowledge and excellence on the practical formulation and implementation of policies in its domain and that all staff have the capacity to bring that knowledge to its discussions with individual member countries.
Some see other potential purposes for surveillance, and this, I believe, will become increasingly an issue as the Fund debates its strategic direction over the next six months. There are proposals, for example, to link the financial resources available to a member country when it faces a crisis to the extent to which it took account of the Fund's earlier warnings in the context of surveillance about the vulnerabilities that were building. This strikes me as reminiscent of the threat systems that parents may use with their children—do what I say this afternoon or no desert tonight—and likely to be equally ineffective! I do not believe this suggestion has much merit. Can the Fund, as a cooperative institution, say "no" to a member when it needs financial support if it has misbehaved in the past? I would argue that it cannot, and should not, so long as the member is then ready to take the needed corrective policies. The reality, of course, is that, frequently, by the time of the crisis, the Fund may be dealing with a new government that was not responsible for the sin of ignoring earlier Fund advice.
Related to "purpose" is the question of the audience for surveillance. In its original construct, that was essentially the Executive Board and country officials privileged to see Fund documents. That construct has gone by the boards with transparency, and that is to the good. But I believe we may have drifted a bit here without getting real agreement on some of the key issues raised by transparency. Surely, it is a better world with surveillance reports—as well as the documents related to the newer surveillance tasks of assessing countries' progress on various standards and codes such as ROSCs and FSAPs—available to people like yourselves in the markets and to the public at large. These documents contain analysis, and policy commitments, that should be the stuff of public debate in democracies.
To date, much of the push towards transparency has been done voluntarily, but with a very strong element of peer pressure. However, the familiar challenge of how this would affect the Fund's role of confidential advisor and spur to policy action, versus its new role as informer of markets, has not been fully resolved. There are, of course, questions about the extent to which the Fund really serves as a confidential advisor. But, at the same time, there is little doubt that officials in many countries open up to Fund staff in a way that they do not open up to others. That helps staff understand the operational realities and political feasibilities of domestic policies and helps avoid some naivety in policy assessments. But can this be preserved if the staff is also writing for markets? This is tricky business and some country officials themselves say these two roles are in conflict!
This goes to questions about the effectiveness of surveillance. The first requirements for effectiveness are obviously technical competence and some degree of political savvy. But another requirement is the ability to get country authorities to take the proper action when vulnerabilities threaten. This is the essence of crisis prevention. Is this done best by private persuasion or by public warnings? Look at surveillance of Thailand in late 1996/early 1997 as an example. It succeeded insofar as vulnerabilities were identified and assessed, and representations to deal with them were made at the most senior levels. But surveillance failed insofar as the Fund did not get the authorities to address these vulnerabilities and to change policy. Would the Fund have been more effective if we had gone public? Or would we have been seen as precipitating the crisis? The Thai, and earlier the Mexican, and later the Korean experience, were the catalysts for the unprecedented moves to make the Fund more transparent. But I remain unconvinced that we have fully resolved the potential conflicts inherent in the roles the Fund is being asked to play and whether we have got the transparency issue successfully resolved. There may also have been too little attention paid to the distinction between transparency of countries themselves and transparency by the Fund about countries.
Here an aside, to indicate why I believe these issues surrounding governance and surveillance are so important. The Asian crisis, and the Fund's response, have left an unhappy residue in much of Asia. There is still, I believe, less agreement than would be desirable even on something as basic as the causes of the Asian crisis. But beyond this, the voice and vote and representation issues—and the refusal of the major countries to deal with them—are further aggravating relations. And the push towards transparency, without trying to better reconcile it with the traditions in some Asian cultures, may be further weakening relations. Is it any wonder that this atmosphere, together with the incredible build-up of reserves in the region, is giving renewed strength to those calling for an Asian Monetary Fund—the value of which I believe to be questionable for Asia as well as for the Fund, but which could also be a bellwether for other regions if, they too, become disaffected from the Fund.
The Fund's Role in Emerging Market Countries
Let me turn to the third issue, the Fund's role vis-à-vis its emerging market country members—hopefully an expanding group over the next decades, which gives added importance to these issues. This is where the rubber hits the road on transparency issues, in particular, as the markets pay close attention to Fund views and to Fund moves in these countries!
But let me take up some of the other issues related to the impact of Fund policies in emerging market countries. Besides the fundamental matters of governance and the size of the Fund touched on earlier, four issues, in particular, are worth some attention: signalling; access policy; workout mechanisms; and the Fund's policy on lending into arrears. I will touch just briefly on each.
Signalling is, of course, a close relative of transparency, even though the Fund has been sending signals since long before transparency became the vogue. This was most obvious through its approval, or not, of financial arrangements with members. But transparency opens new, more subtle doors and the growing appetite of markets for information has created demand. In a transparent world, virtually anything the Fund does or says may be interpreted as a signal regarding its views on a particular country. The most obvious signals derive from approving, continuing, delaying or halting lending arrangements with countries. But the nature of the arrangement also contains signals. Approval of an SBA or EFF, where there is money involved, may signal something different from a Fund-monitored program, and surely something different from a staff-monitored program.
There are continuous calls for Fund signalling mechanisms, but some attempts at response have faltered. The Short-Term Financing Facility (STFF) that was discussed in 1994 and which would have provided something akin to a credit line linked to Fund surveillance, died with the Mexican blow-up before it could be tested. Contingent Credit Lines (CCL), created in 1999 and modified in 2000, were intended to protect countries from contagion. However, the CCL had many of the same characteristics as the STFF and failed from lack of use and has been allowed to expire. The problems are well known: creditor countries in the Fund wanted more conditionality and slower disbursements; borrowers less conditionality and more money up front; the entry signal would likely be positive and welcome, but the exit could be a problem; some saw moral hazard, others saw policy discipline. For the Fund more broadly, some saw the risk of gravitating towards a rating agency. In the end, none of these issues were successfully resolved and I suspect they will continue to bedevil attempts to create new, more imaginative signalling mechanisms in the Fund. Perhaps the answer is to stay with the blunt instrument of approval of an SBA, and greater use of precautionary SBAs, and the more subtle—and public—assessment of a staff appraisal in the context of surveillance and give up the search for something in between.
Let me turn to access policy, which determines a member country's window to Fund resources. I believe it also remains unsettled. There is some appearance of agreement! Those wanting more limited access to Fund resources have succeeded in imposing tighter procedures for the approval of access beyond the traditional limits of 100 percent/annual and 300 percent/cumulative. But exceptional access clearly remains an option. Putting the burden of proof on those recommending exceptional access is surely appropriate—although, as you can probably tell from my earlier remarks, I am one of those who believe that access would not look so exceptional in so many cases if the Fund and Fund quotas were appropriately enlarged!
The calls to restrict access are motivated by:
- moral hazard considerations;
- the alleged benefits of greater predictability for markets; and
- a desire on the part of some in the membership to clip the wings of Fund management post Mexico, Asia, Russia, et al.
But each of these motivations is subject to challenge. Few see moral hazard on the debtor side: most governments do not survive crises and are unlikely to invite them simply because the Fund may be there with large amounts of money. On the creditor side, there is an issue, but is it over-riding and is limiting access to Fund resources a necessary element of a sensible response to this phenomena? Similarly on predictability. I confess I have never understood the appeal of having the Fund deal more predictably vis-à-vis markets. Isn't that a recipe for one way bets and well-timed exits, instead of appropriate caution? In any case, the Fund will always be somewhat unpredictable in its responses, if only because of the judgemental element in deciding between liquidity and solvency problems. And as liquidity needs can at times be large—and it can be appropriate to fill them (as in Mexico in 1995, Thailand and Korea in 1997, and other cases)—the Fund should be able to respond with the needed financial support. In sum, I think the current access policy pretends too much, at least as regards its contribution to predictability. Hopefully, it will not tie the hands of the Fund when large resources are appropriate for a country in trouble. Given the discretion permitted, I would guess you will see cases of exceptional access in the future, as you have in the past.
Related to access policy in crisis cases is, of course, the matter of debt workouts. On the positive side, I believe the debate and discussion on SDRM, CACs and a code of conduct—or as it is now called "Principles for Stable Capital Flows and Fair Debt Restructuring" have been enormously productive. Not only have they pushed practice forward by moving emerging market countries to include CACs in their bond issues—perhaps because they perceived the threat of something worse—but it has vastly increased the understanding of the international community of the issues involved. This is important, because I believe we will be back to the discussion of some kind of statutory mechanism in the not too distant future. I do not believe that CACs have the power to do what is needed in more complex cases—although the international financial system is better than it was before with their more extensive use. So I think we should keep all the good, institutional, academic, and legal work that was done in the context of the recent debate on a nearby shelf.
An aside on this. We need to be careful about how the Argentine experience is interpreted after a deal is struck between Argentina and its private creditors—whenever that may be. Whatever the deal, I hope that it will not be interpreted to mean that the markets, together with the debtor country, had the capacity to find a satisfactory solution to an obvious need for debt write-offs and restructuring even in a case as complicated as this. Everyone needs to keep in mind the enormous cost—on the part of both creditors and the Argentine society and people—that will have been endured by the time a settlement is reached. The cost is enormous, and continues to be paid, and will not be reversed by any restructuring. I believe a good case can be made, as well, that much of that cost could have been avoided.
Having brought up Argentina, let me touch on the Fund's policy on lending into arrears. The policy is straightforward and built on experience: if a country falls into arrears to its private creditors, the international community cannot hand the discretion to help that country to those same creditors who may be demanding that agreement on a debt deal be struck before the Fund lends. At the same time, the official community needs to recognize the legitimate rights of creditors. The Fund's policy on lending into arrears attempts to strike a balance. The country must be judged to be acting in good faith with its creditors in finding a solution to its debt problem for the Fund to initiate or continue lending to the country. That policy was given more flesh in September, 2002 when the Fund Board agreed to certain principles and more specific criteria to be used to judge the dialogue taking place between debtors and their private external creditors. We could argue endlessly, I suppose, about whether those criteria have been met in the case of Argentina. But I have a somewhat different point. I am concerned that when deciding to lend into Argentina's arrears to private creditors, the IMF did so without putting forward a detailed analysis of Argentina's medium term debt service capacity.
We have been told by some that this is a new policy of the Fund, to leave the determination of the medium term fiscal path—beyond that required to service debt to the IFIs—to the debtor and its private creditors. But I have not seen a policy paper on this issue and I know of no formal discussion in the Board on this important matter. More importantly, I believe that stance is not tenable. Ultimately, the Fund will have to make a judgement on the sustainability of Argentina's position under any debt deal that is struck. Consider the possibilities. If a deal is not struck, the Fund will have to decide whether to continue lending to Argentina. That decision will have to rest, in part, on whether Argentina's creditors rejected a deal put forward by the authorities that balanced well the interests of the two sides or that Argentina rejected an offer of the creditors that was, in fact, within its capacity to pay or, indeed, if the creditors were provided a genuine opportunity, through negotiations, to make an offer. These judgements will require assessment by the Fund of Argentina's medium term prospects and its capacity to adjust in a socially acceptable manner. Similarly, if a deal is struck, the Fund will have to judge the sustainability of Argentina's external position under that deal and its capacity to service its obligations to the Fund. If the deal lies outside what a sustainable medium term path would suggest and the position does not look viable, the Fund cannot continue to lend.
But even before this point is reached, I believe the passivity of the official sector may have made finding a solution more difficult. Effectively, the Argentine authorities have been told to negotiate not only a debt deal but also their macroeconomic program—most importantly the path for the primary fiscal surplus—with their private external creditors. This may well make giving any ground to the creditors more difficult for the Argentine authorities to sell domestically. I also wonder if the many creditors involved, who will have to find common ground on the elements of what is likely to be a very complex debt deal, will also be able to find agreement on the parameters of a medium term macroeconomic scenario. The passivity of the official sector may also make it more difficult for it to play a constructive role at a moment when a nudge in this direction or that could help the parties find agreement. As Nouriel Roubini has said: "The IMF's hands-on role in the restructuring process is part of what makes the sovereign debt restructuring process work in the absence of the supervision of a bankruptcy court, (it is) not an unwarranted official interference in a private commercial dispute."5 I agree completely with this. This seems to be the view of many in the private sector as well, some of whom suggest that, if the Fund is to distance itself from the process as it has, perhaps its preferred creditor status should be rethought. I believe that would do irreparable harm to the Fund, and its role in the future in helping countries deal with the debt crises that, unfortunately, but inevitably, will continue to occur.
Finally, let me conclude on another topic that should be coming to the agenda. That topic concerns capital account liberalization and the Fund's authority in that area. Some of you will recall that there was an effort during 1996-98 to agree on an amendment to the Fund's Articles of Agreement to make capital account liberalization a "purpose" of the Fund—as is current account liberalization from the original Articles—and to give the Fund jurisdiction over the approval of member countries' capital account restrictions. That effort failed, partly because of the reaction to the effort by those who thought that the Fund would use such jurisdictional authority to force members to liberalize; partly because of resistance on Wall Street and elsewhere to giving bureaucrats in Washington more authority over anything; and partly because it got swamped by the capital account crises in Asia and elsewhere in the late 90's and thereafter;
I believe this issue should be revisited. Among other things, other organizations (including the WTO) and some bilateral initiatives are promoting such liberalization, which creates a risk of additional pressure on Fund resources, without appropriate input from the Fund. For such an initiative to be more successful this time around, several things would be needed. First, we need to clear the air on what the Fund was advising member countries regarding capital account liberalization in the early and mid 90's. There is, of course, the stereotype that presents the Fund as blindly advocating capital account liberalization among the membership regardless of their situation. I was in the Fund throughout that period, and I can tell you that that was not my perception of how we were operating. I've learned recently that a study underway in the Independent Evaluation Office (IEO) of the Fund is likely to come to a similar conclusion. While there was widespread agreement among economists that countries would benefit from opening their capital accounts, there appears to be little evidence of the Fund pressuring countries to do so.
Second, we need to make sure that lessons of the capital account crises of the last 10 years are well-learned and well-integrated into Fund operations. I believe that many of these lessons have been internalized. The pace and sequencing of specific measures and the strength of domestic financial institutions, including the supervisory and regulatory authorities in a country, matter. Aspects of these concerns have been operationalized in the Fund including through FSAPs and other initiatives.
Third, the motivation for an amendment needs to be made clear. It should not be to give the Fund the power to force liberalization; we've learned enough about the importance of ownership to know that force and pressure seldom produce anything useful. The motivation is rather, in my view, to fill a regulatory gap in the international institutional structure and, by making liberalization a purpose of the Fund and giving the Fund jurisdictional authority, to better coordinate this activity within the Fund and, perhaps, even provide the resources needed to carry out the associated responsibilities. All of this is simply to help make capital markets work more effectively and to bring some order to what has sometimes been a chaotic and not very well-managed process.
Some will continue to argue that it is enough for the Fund to `advocate' and that it does not need jurisdictional authority. I don't believe that that is sufficient.
1 The views herein are those of the author and do not necessarily represent the views of the IMF or the Office of the Managing Director.
2 There is a very important issue regarding the IMF's role vis a vis its low income member countries but that is well beyond the scope of this presentation.
3 Each member country has 250 "basic votes" plus one additional vote for each 100,000 Special Drawing Rights (SDR) of its quota. As quotas have increased over the years, the share of basic votes in total votes has fallen from 11 percent in 1945 to 2 percent at present. The intention at Bretton Woods was for basic rates to account for 11 percent of the total (Boughton, James M., Silent Revolution: The International Monetary Fund 1879-1989, Washington, D.C.: IMF, 2001)
4 See, for example, Stabilization and Reforms in Latin America. A Macroeconomic Perspective of the Experience Since the Early 1990's (IMF Occasional Paper, forthcoming, 2005) and Lessons from the Crisis in Argentina (http://www.imf.org/external/np/pdr/lessons/100803.htm, 10/8/03)
5 "The Reform of the Sovereign Debt Restructuring Process: Problems, Proposed Solutions, and the Argentine Episode." 1st Reading, Journal of Restructuring Finance, Vol. 1, No. 1 (2004) 1-12.
IMF EXTERNAL RELATIONS DEPARTMENT