BRUSSELS – The International Monetary Fund is back in business. During the bubble years, neither its advice nor its money seemed to be needed.
But now more and more countries need balance-of-payments support, and there is general agreement that the global monetary system needs a body to oversee its overall stability.
The IMF is the only candidate for this task, but experience has shown that the Fund can fulfill this role only if its governance is reformed.
Granting balance-of-payments support has important fiscal implications, and it is natural that there should be continuing close oversight by those who ultimately provide the capital – the IMF’s member states.
But looking after the stability of the global financial system, including the assessment of exchange-rate policies and global payment imbalances, is a different responsibility.
For these analytical functions, there is no need for close oversight. On the contrary, independence and professional expertise should be decisive.
Thus, a key change should be to distinguish between the IMF’s financial measures and its analytical functions, especially the surveillance of exchange rates and other sources of global financial risk.
The IMF’s Executive Board, which consists exclusively of representatives of member countries, currently runs the Fund’s daily business.
The Board thus does not perform oversight functions, but rather serves essentially as an extended Management Board, which delegates the execution of its decisions to the Managing Director and the staff.
This modus operandi needs to be changed in order to give the IMF the independence it needs if it is to become a credible, impartial judge of balance-of-payments disequilibria and sources of risk to global financial markets.
This requisite independence of the IMF staff can be achieved by stipulating that the Board oversees only the work of the Fund’s analytical functions and, more importantly, that its composition and decision-making mode are overhauled in the following ways:
- The Executive Board should be enlarged by the addition of several (possibly 3-5) independent members (as in the private sector), and the voting principle should be one person, one vote. The independent board members would constitute only a small minority, but their presence and professional expertise would give them disproportionate weight.
- Management would be free to take a position on all issues not involving the use of Fund resources, unless it is was explicitly overruled by the expanded board. This would give management considerable de facto independence, since under the one person, one vote principle the larger member countries could no longer block issues just because they are politically inconvenient.
For all decisions involving the resources of the Fund (lending to member countries or the size of quotas, etc.), the existing decision-making procedure could remain unchanged. All financial decisions would thus continue to be taken by the existing Executive Board, with weighted voting reflecting the financial contributions of member countries.
The European Central Bank provides an interesting analogy, because it has two voting procedures, depending on the issue at hand. The ECB’s Governing Council comprises the six members of the Executive Board plus the governors/presidents of the 16 national central banks of the eurozone countries.
The Governing Council takes the really important decisions on monetary policy based on one person, one vote. When the Maastricht Treaty was negotiated, the Germans considered this provision an important concession.
But it is indispensable if the ECB is really to be independent, and if one expects that all members of the Governing Board, particularly the governors of national central banks, base their decisions only on the interests of the entire euro area (and not of their home country).
However, on financial matters (in particular the distribution of profits and losses), the voting rules are different: the Executive Board does not participate and the votes of the national central bank presidents in the Governing Council are weighted by their respective capital shares.
When the G-20 leaders meet in London, they should consider giving the IMF the independence it needs to become an effective guardian of global financial stability. Putting independent experts on this Board will be a key step in that direction.
Daniel Gros is the Director of the Centre for European Policy Studies (CEPS).