Is the IMF obsolete?

• Position: A SYMPOSIUM OF VIEWS - International Monetary Fund

Several years ago, even asking such a question would have seemed absurd. Yet today, with the narrowing of risk spreads in an era of increasingly interconnected markets and more efficient risk management, is the IMF's role still relevant? Has the rise of Asia, with its reliance on self-insurance by reserve accumulation since 1998, shown the Fund the door?

The institution already once in its history, after the United States went off the gold standard, redefined its mission. Is there a need for a second round of mission redefinition? If so, what's the next mission? Some have suggested the IMF become a technical assistance institution, helping the developing world set up better financial systems, but that would require market specialists, not the predominantly academic staff currently in place. Others have suggested the institution take on a new central role in multilateral surveillance, including of rich countries. The absence of volunteers, though, may make that idea stillborn. Still others suggest gains from consolidation by merging together the World Bank and the IMF. But that might make for conflicting irrelevant missions.

Never in the history of the world has a bureaucracy on its own shut itself down. Could this be the first time? Should it be?

JACQUES DE LAROSIERE

Advisor to the Chairman, BNP Paribas, and former Managing Director, International Monetary Fund

Financial developments have not, in my view, made the IMF obsolete. On the contrary, they have made its adaptation to the new challenges all the more important.

Three major developments have occurred. One is the mounting economic and financial power of a number of emerging countries that were formerly Fund borrowers and who are now the largest holders of international reserves of the world. How to better integrate those countries in the financial system?

The second challenge is that monetary stability is today more vulnerable in an environment of excessive indebtedness, asset bubbles, and underpriced risk. How can the Fund contribute to more stability?

The third factor is the present functioning of the exchange rate system. The Fund's Articles of agreement call for an active role for this institution in terms of multilateral "surveillance," which means a strong influence in the way underlying policies and interventions shape up exchange rates. How to achieve that aim?

These three major challenges will not be resolved only by a fairer distribution of quotas. They will also--and in my view more importantly--require a true political willingness of major countries (advanced and well as emerging), to abide by the policy recommendations of a strong and objective IMF.

KENNETH ROGOFF

Thomas D. Cabot Professor of Public Policy, Harvard University, and Former Chief Economist and Director of Research, International Monetary Fund

The IMF has thrived over the years by constantly reinventing itself to meet the evolving needs of global financial governance. The fact that it now needs to do so again should inspire creativity rather than panic.

Some of the required reforms are manifestly clear and widely agreed upon. First and foremost, voting shares need to change to fully reflect the changes in the balance of global financial power. Asia should gain votes at the expense of Europe to a far greater degree than is currently being contemplated.

Second, Europeans need to relinquish their absurdly anachronistic prerogative of appointing the Fund's Managing Director. (Parenthetically, the United States should immediately and forever forfeit its right to appoint the head of the IMF's sister institution, the World Bank.)

Third, the Fund's governing board needs to put the Institution's financing on a sustainable basis by securely endowing it with the funds needed to pay for the IMF's surveillance and technical assistance activities, supplemented possibly by charges for the latter. Selling off a portion of the Fund's massive--and vestigial--gold supply would be a fine way to accomplish this.

After that, there is less agreement. I personally believe the Fund should phase out of the emerging market bailout business completely. The broad shift to stable macroeconomic policies, and especially to flexible exchange rates (a move the Fund fully embraced only well after the Asian crisis), has done far more to make the world less crisis-prone than any change in Fund bailout policies might have accomplished. Too often, adjustment is postponed and debt renegotiation is delayed when debtors and creditors believe official bailout money might be forthcoming. Stanford Professor Jeremy Bulow and I first highlighted this moral hazard problem in a series of papers some twenty years ago, albeit our concept was broader than the one sometimes used in popular discussions. The problem still seems central to me, even though some people close to bailout negotiations profess to be blind to it.

GARY HUFBAUER

Reginald Jones Senior Fellow, Peterson Institute for International Economics

For many years the IMF hasn't had the financial or political muscle to shape up the big boys. The United States, European Union, Japan, and China can do pretty much as they please--in terms of fiscal stance, interest rates, or exchange rates--either cooperating or not as suits their tastes. For the big boys, the IMF can be no better than a scholarly scold. A useful role, to be sure, but not a task that justifies a staff of thousands.

But there is a vital dimension of the world economy where the IMF still has the brains and clout to make a difference. To be done right, this alternative task does require thousands of capable and experienced financial economists and computer wizards.

In his recent Ph.D. thesis, Hyun Koo Cho demonstrated that U.S. banking deregulation in the 1990s accentuated the volatility of bank lending to emerging markets. Since then, we have witnessed vast new waves of financial deregulation centered on hedge funds and private equity. Add to that the overwhelming evidence of herd behavior among financiers and crisis contagion between countries and the conclusion is inevitable. Anyone who thinks that the emerging market crises of the 1990s are a thing of the past is living in a dream world. The global financial shock in early March, emanating from a 9 percent drop in the Shanghai stock exchange, should awaken even the soundest sleeper.

Faced with this reality, the IMF should right now be busy on two fronts. First, it should create a real-time surveillance system for monitoring, on a confidential basis, the financial flows of the top players--the top two hundred banks, the top one hundred insurance companies, the top one hundred hedge funds. The emphasis should be on money flows in and out of emerging markets. This information can be used to warn financial players and countries of unusual buildups. It can also be used, in times of crisis, to counsel against herd behavior, and make proactive emergency loans.

Second, the IMF should augment its own financial war chest. Right now the Fund falls well short of the Pentagon's old readiness standard--an ability to fight two wars at the same time. Financial markets have been well-behaved for the past five years. But an era when global finance reaches new records every year is not a time for the Fund to be winding down its own resources. Instead, the Fund should be negotiating substantial unconditional swap fines with the major central banks, along with the flush central banks of nations such as Saudi Arabia, Singapore, and Switzerland. When the next financial firestorm rages, the last thing the world needs is a fireman with an empty hose.

EDWIN M. TRUMAN

Senior Fellow, Peterson Institute for International Economics

The IMF is not obsolete. It is one of the principal institutions of global governance. Those who associate the Fund with financial rescue operations ignore the fact that less than 20 percent of its administrative expenses are associated with lending activities. The balance is involved in the provision of public goods in the form of surveillance of global economic and financial developments and vulnerabilities.

Benign conditions over the past five years have lulled many into the mistaken view that the bad old days of the 1990s are behind us forever. It is regrettable that the management of the institution and its principal shareholders have not been more proactive in putting in place needed reforms to reposition the IMF. Those reforms should start with governance reforms including the realignment of quota and voting shares with members' relative weights in the global economy as they have evolved over the past three decades in which no such adjustments have been made. The United States and Europe should also abandon their hold on the CEO positions at the World Bank and Fund. The Fund's role in surveillance of economic and financial policies should be upgraded. The Fund's capacity to provide high-access financing to members contingent on their strong policies should be further developed. Finally, as recommended in the Malan Report on Bank-Fund Collaboration, the Fund's engagement with low-income members needs to be scaled back and refocused.

All this may well require a leaner and meaner IMF with a different type of staff. It is not consistent with shutting down the Fund.

ALLAN MELTZER

Visiting Scholar, American Enterprise Institute, and Chairman, International Financial Institution Advisory Commission (1998-2000)

The IMF has lost a clear sense of mission and purpose, and it has lost the support of many members. Members have built reserves and made other arrangements to avoid borrowing from the IMF. Leadership of the IMF has been unwilling to reduce spending by closing the Poverty Reduction and Growth Facility.

The IMF should reorganize to achieve three tasks: first, prevention of systemic crises; second, improvements in the quality and quantity of information; and third, provide incentives for prudent financial behavior and open financial...