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?
Visiting Scholar Allan H. Meltzer
Allan H. Meltzer
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 markets.
Allan H. Meltzer is a visiting scholar at AEI.
In today’s world of unprecedented global payment imbalances and of major risks to the global economic recovery, there is as strong a need as ever for a multilateral institution to safeguard the international monetary system. In particular, at this time of rising protectionist pressures, one would want an institution specifically mandated to prevent a return to the “beggar-my-neighbor” policies of the 1920s and 1930s.
Sadly, today’s IMF is patently not rising to that challenge. It says little about the numerous egregious cases of currency manipulation that thwart the global adjustment process. And it offers little leadership in helping to find a collaborative solution to the world’s payment imbalance problem.
If the IMF is to have relevance in today’s world, it needs to abandon its mantra of not wanting to be the world’s exchange rate umpire. Rather, it needs to return to its original mandate of promoting international monetary cooperation through the very much more active exercise of multilateral exchange rate surveillance.
On the lending front, global capital market developments notwithstanding, the IMF will continue to have an important role to play in helping resolve emerging market balance of payment crises as they arise. It would be a mistake to assume that the remarkably benign external conditions, which emerging market economies have enjoyed over the past five years and which have allowed them to prepay the IMF, will endure indefinitely. Rather, one must anticipate that a number of emerging markets will again need major IMF support as they did in the past as international commodity prices decline and as global credit conditions become decidedly less supportive.
Desmond Lachman is a resident fellow at AEI.
The IMF has a legitimate mission, but it has not focused on that mission or restructured its lending policies or governance to achieve it. The IMF should not be a policy coercer. Its efficacy in that role has been mixed at best, and it is no longer obvious how coercion would be applied. Are Japan, China, Brazil, Mexico, India, Korea, Russia, the United States, and the European Union likely to agree on what sort of coercion should be applied to Pakistan or Turkey?
The IMF could play an important role as a coordinator of liquidity to prevent and mitigate emerging market crises. But the IMF today lacks the size and structure to provide meaningful liquidity. The key impediment is political. Because member countries have not agreed on this narrow focus they have not created the rules necessary to implement it. Instead, the IMF drifts with an ineffectual structure, undefined mission, and limited resources.
The IMF should create one assistance mechanism to replace all others. This new line of credit should be supplied under credibly enforced rules, defined in advance, that would limit the abuse of the line by constraining discretion in determining the terms on which credit could be supplied. IMF governance reform is the first step toward achieving these objectives. Governance reform does not mean broadening political control through changes in members’ voting rights. It makes little sense for the IMF to be governed by finance ministers who can be relied upon to resist any rules that limit their discretionary interventions. It makes more sense to empower G7 central bankers to take the lead in establishing new rules for the IMF and in implementing.
Charles Calomiris is a visiting scholar at AEI.