Reform or uselessness for the IMF? by Raghuram G. Rajan

Eight decades after the creation of the International Monetary Fund, the world can – and must – pursue a grand deal to reform its governance structure and address emerging challenges. As things stand, the Fund is increasingly poorly placed to carry out the tasks expected of it.

CHICAGO – The world needs an effective International Monetary Fund. Countries have taken on heavy debt as a result of the COVID-19 pandemic, and the risk of further shocks increases as the world warms and new pathogens emerge. Protectionism (sometimes masked by security interests) is on the rise, hampering traditional development paths. As economies falter, no one wants to absorb the desperate people who brave dense jungles or board rickety, overcrowded boats in search of decent livelihoods.

We need an honest broker to help countries negotiate fair rules for international trade (including, for the immediate future, rules on subsidies), to expose violators, to criticize bad policies and to step in as a lender of last resort for those in distress. Unfortunately, the IMF, despite the high quality of its management and staff, is increasingly ill-positioned to accomplish these tasks.

The institution’s problems lie in its anachronistic governance. Most key decisions, particularly regarding lending to countries, are made by the Fund’s board, where G7 members hold most of the power. The United States has a de facto veto and Japan’s voting power exceeds that of China, whose economy dwarfs Japan’s. India’s vote share is much lower than that of the United Kingdom or France, even though its economy is larger and growing faster than both.

Because the world’s once-dominant powers refuse to let go, the underrepresentation of fast-growing emerging economies persists. At the same time, it is no longer clear that the old powers still have the global interest at heart. In the immediate postwar period, the United States, as the sole economic superpower, could be trusted to uphold the rules of the game and generally stay above the fray. But as his fears of being overwhelmed grew, he moved from referee to player. Once an advocate that openness benefits everyone, he increasingly wants openness only on his own terms.

The quality of the Fund’s lending decisions is also likely to deteriorate. Whenever the Fund lends, it is natural that well-connected and economically distressed countries tend to get more aid on easier terms. Although there have always been political influences on IMF lending, the chances of success have been greater in the past through outside help from powerful board members – think, for example, of Mexican crisis of 1994, where the United States made a considerable contribution. part of the rescue plan.

With budgetary resources now limited, even within the G7, the IMF will increasingly have to risk its capital as powerful board members, with relatively little leverage in the game, extend loans to their friends and neighbors. Worse, such special treatment might not even help loan recipients, many of whom need tough love.

Secure your copy of PS Quarterly: The climate crucible

Secure your copy of PS Quarterly: The climate crucible

The latest issue of our magazine, PS Quarterly: The climatic crucibleis here. To access all of the magazine’s content digitally and receive your printed copy, subscribe to P.S. Premium now.

Subscribe now

In summary, the IMF’s governance structure will increasingly undermine the Fund’s work. But won’t redistributing IMF votes to reflect the current distribution of economic power lead to chaos? Won’t China block loans to any country linked to the G7, and vice versa? Isn’t dysfunctional governance better than absolute paralysis?

This is perhaps why any reform affecting countries’ voting rights should be accompanied by a fundamental change in the governance of the IMF. The board should no longer vote on operational decisions, including individual loan programs. Instead, the Fund’s management should be given free rein to make operational decisions in the interests of the global economy, with the board setting general guidelines and periodically reviewing whether those guidelines have been respected.

More specifically, the board of directors should become a governance council, like companies. It would define the operational mandate of the organization, appoint and change management and monitor overall performance; but it would not control day-to-day decisions. All operational decisions must be depoliticized. This is also what John Maynard Keynes would have preferred to see when the Fund was created. Fearing undue influence from America, he proposed a non-resident board, which, in an era of poor communications and steamboat travel, meant a non-executive board and empowered management .

There are some predictable objections to this proposal. The first is that powerful countries will refuse to commit their taxpayer resources to the Fund unless they can exercise complete control over their use. But this is precisely what the dominant powers already expect from the rest of the world. What is good for the goose…

Another objection is that emerging powers like China may not accept a change in the Fund’s structure now that they themselves are poised to gain power. But if they don’t accept any change, neither will the old powers. The recent 16th general quota review brought little change to the distribution of board power. Expect more of the same unless the old and emerging powers come to a grand agreement.

Finally, countries would be concerned to see their budgetary resources spent by unelected leaders who are insensitive to the needs of the world’s populations. But political considerations will always play a role. Board directors, appointed by governments, will appoint top IMF leaders and give them broad marching orders, based on their government’s policy assessments. For example, rules governing loans can become more lenient if administrators deem it appropriate. The difference is that the rules will be applied uniformly in all countries. Powerful friends of the needy can still help, but they will have to do so outside the Fund’s program, rather than bending the rules.

Eight decades after the founding of the IMF, the world can – and must – pursue a grand deal to reform its governance structure and address emerging challenges. The alternative is to do little and watch the institution become obsolete.