Unlocking IMF Reform

Barry Eichengreen

Barry Eichengreen, Professor of Economics and Political Science at the University of California, Berkeley, is the author, most recently, of In Defense of Public Debt (Oxford University Press, 2021).

AIX-EN-PROVENCE – In July 1944, exactly 80 years ago, representatives of 44 countries met in an obscure New Hampshire village to negotiate the Bretton Woods Agreement establishing the International Monetary Fund. For many, reaching the ripe old age of 80 would be cause for celebration. For the IMF, the anniversary only highlights the urgency of reform.

Some necessary reforms are straightforward and widely agreed, raising the question of why they haven’t been adopted. First, the IMF should provide its members with regular annual allocations of its in-house financial instrument, special drawing rights. This would provide an alternative to the US dollar as a source of global liquidity while also addressing the problem of chronic global imbalances.

Second, the IMF needs to do better at organizing debt restructurings for low-income countries. Its latest attempt, the rather grandly named Common Framework for Debt Treatments, has fallen short. The Fund needs to push harder for cooperation from China’s government and financial institutions, which are unfamiliar with the responsibilities of a sovereign creditor. It should support reforms to speed up restructurings and endorse initiatives to crack down on holdout creditors.

In terms of its surveillance of countries’ policies, the IMF needs to address its perceived lack of evenhandedness; whereas emerging and developing countries are held to demanding standards, high-income countries like the United States are let off the hook. It needs to reinvigorate its analysis of the cross-border spillovers of large-country policies, a process the US has managed to squelch.

As for its lending policies, the IMF needs to decouple loan size from an anachronistic quota system and reduce the punitive interest rates charged middle-income countries.

To ensure the best possible leadership, the managing director should be selected through a competitive process, where candidates submit statements and sit for interviews, after which shareholding governments vote. The victor should be the most qualified individual and not just the most qualified European, as has historically been the case.

Most of all, the IMF must acknowledge that it can’t be everything for everyone. Under recent managing directors, it has broadened its agenda from its core mandate, preserving economic and financial stability, to encompass gender equity, climate change, and other nontraditional issues. These are not topics about which the IMF’s macroeconomists have expertise. The IMF’s own internal watchdog, the Independent Evaluation Office, has rightly warned that venturing into these areas can overstretch the Fund’s human and management resources.

Admittedly, the IMF can’t ignore climate change, since climate events affect economic and financial stability. Women’s education, labor force participation, and childcare arrangements belong on its agenda insofar as they have implications for economic growth and hence for debt sustainability. Fundamentally, however, gender-related policies and climate-change adaptation are economic-development issues. They require long-term investments. As such, they fall mainly within the bailiwick of the World Bank, the IMF’s sister institution across 19th Street in Washington.

An advantage of an agenda focused on the IMF’s core mandate is that national governments are more likely to give the Fund’s management and staff the freedom of action needed to move quickly in response to developments threatening economic and financial stability. The IMF lacks the independence of national central banks. Currently, decision-making is slow by the standards of financial crises, which move fast. Decisions must be approved by an executive board of political appointees who in turn answer to their governments.

But central-bank independence is viable only because central bankers have a narrow mandate focused on price stability, against which their actions can be judged. For a quarter-century, observers have argued that a more independent, fleet-footed IMF would be better. But the more the institution dilutes its agenda, the more such independence resembles a pipedream.

The other factor underpinning the viability of central-bank independence is that monetary policymakers at the national level are accountable to legitimate political actors, generally parliaments and ministers. The legitimacy of IMF accountability is more dubious, owing to the institution’s governance structure.

For antiquated reasons, the US – and only the US – possesses a veto over consequential IMF decisions. Europe is overrepresented in the institution, while China is underrepresented. Until these imbalances are corrected, the Fund’s governance will remain under a shadow. This not only makes the prospect of operational independence even more remote; it also stands in the way of virtually all meaningful reforms, including the straightforward changes listed above.

Sketching a reform agenda for the IMF is easy. Implementing it is hard. Real reform will require the US to give up its veto in the institution. It will require China to assume more responsibility for global stability and the problems of other economies. And it will require the US and China to work together. For two countries that haven’t shown much ability to cooperate in recent years, IMF reform would be a good place to start.