- To help readers better understand the nuances of foreign policy, CFR staff writers and Consulting Editor Bernard Gwertzman conduct in-depth interviews with a wide range of international experts, as well as newsmakers.
The late September G-20 summit in Pittsburgh called for the International Monetary Fund (IMF) to take on a major role in "promoting global financial stability and rebalancing growth." But Edwin M. Truman, a senior fellow at the Institute for International Economics, says the IMF will need to reform how it is governed to increase its influence with member countries, and those reforms could take years. Truman also says the IMF isn’t likely to boost its currency, the Special Drawing Rights, to a global reserve currency anytime soon, since countries like China won’t support a drastic shift in the short term that puts "constraints on their own policies."
The outcome of the G-20 summit gave the IMF a role in overseeing individual countries’ efforts to revive the global economy, but the specifics have been left for the annual meetings [October 6 and 7] in Istanbul. What do you expect to come out of the meetings?
There are two aspects. One is the IMF’s role in the global economy. Then there’s the IMF governance reform aspect. I actually don’t, on either of them, expect much to come out of Istanbul. Broadly, one would expect that the IMF would embrace essentially the components in the Pittsburgh statement: the need for balanced growth and so forth and the IMF’s role in monitoring that process. Istanbul is being asked to sort of bless the overall framework and specifically the IMF’s role in that framework and the compliance of it.
So what would the IMF be doing to implement that framework and oversee compliance?
They would take whatever the framework that the G-20 finance ministers come up with and see whether they’re consistent and what the implications would be for the functioning of the global economy. For example, one of the big issues has to do with the balance between [countries’] domestic demand and [their] total output, and if total output is increasing rapidly and domestic demand is not, then that means the country is going to go into current account surplus. If every [country] puts that down on a piece of paper, then things don’t add up. That would be sort of a consistency check. Or [the IMF] might have the view as to whether plans for fiscal or monetary normalization were appropriately calibrated in terms of amounts and speeds. That would be more of an overall appropriateness standard. The test really is how aggressive [the IMF’s management and staff] are in discharging the responsibilities that have been put to them.
Is being a check on consistency or appropriateness a new role for the IMF?
Yes and no. It has done some of this in the past, at least in principle, when it meets with the G7 countries, though it has tended to take countries’ current policies or the [fund’s] understanding of current policy and run the same exercises. This [new role] is an extension in the sense that it has a little more focus on intentions.
"[The IMF] has gone from a $250 billion institution to a $1 trillion institution. So the fund is a much more relevant and central institution than it was three years ago."
What power does the IMF have to influence countries’ intentions?
The fund would be a participant in what they call a peer review process. To the extent that that [the fund] suggested that the United States or Germany or China policies are out of line or the overall policies are out of line, then [the G-20] would have a discussion about that. Everything is tricky because you’re dealing with sovereign nations, especially to the extent that you’re focusing on the balance between domestic demand and foreign demand. You’re also talking about exchange rates, and the big question is whether the fund will be more or less aggressive in saying that China, for example, should let its exchange rate appreciate more rapidly given that surpluses are rising rapidly. The question is whether the countries will listen to the fund. They’ve invited the fund in, so that means they have some sort of obligation to at least listen more than they’ve done in the past. Let’s not be naïve; it’s not going to lead to, say, the president of the United States or the secretary of the treasury the first time they go through this saying six months from now, "Oh gee, you’re right. Well, I’ll rush back to Washington and change our budgetary policy." But it will reinforce the pressures that already exist within the United States to move in that direction.
Countries like Brazil and China are calling for a reapportionment of voting rights at the IMF. What steps would need to be taken to create a better balance of power in governing the IMF?
The G-20 agreed in Pittsburgh that there should be a shift of 5 percentage points of voting from the overrepresented countries to the underrepresented countries. Now there are a lot of ways of looking at that. The question is how they will sort that process out, of identifying who is overrepresented and who is underrepresented now. The second question is how do you correct this? One way, and that was what was done in 2008, is a general increase in what’s called basic votes. Every country gets the same votes, a sort of one country, one vote policy, if you want to think about it that way, and then [countries get] another set of votes that are based upon the size of their quota [their financial contribution to the fund]. So, you could just increase [the votes], give them a larger quota, or you could increase everybody’s quota but increase [the underrepresented countries’] more.
What’s the likelihood of these reforms actually happening?
They’re not going to take place in Istanbul. The first issue is whether the broader membership of the fund and in the International Monetary and Financial Committee embraces what was agreed upon in Pittsburgh. This will be a negotiation that will take place probably over the next year. Since they have a deadline of January 2011, they’ve got to have it all pretty much all signed, sealed, and delivered by a year from now. They have this question about representation on the executive board and then they also have the issue about the process by which they go about choosing the heads of the IMF and the World Bank. They’re sort of 75 percent of the way to saying it should be a completely open process, but they haven’t used [that process] yet and won’t use it for a while. And then it would all have to be ratified, and one of the issues here is that they went through this [ratification] already in a fairly long and drawn-out process that ended in April of last year. Most countries, not including the United States, but most countries, have not ratified decisions made in 2008.
So if the IMF does give the developing world more voting rights, does that increase or decrease the fund’s influence in the global financial architecture?
Traditional industrial countries have 60 percent of the votes now, and everybody else--emerging market countries and poor developing countries--have 40. So if you shift 10 percentage points of the votes, would you say that’s a lot or a little? I would argue it’s symbolically important. It doesn’t mean that we’ve turned over the management of the IMF to China and India, but we have given China, India, Brazil, Korea, and Mexico a lot more say. And that makes them more receptive to or encouraging of the fund’s criticisms of countries’ policies.
"The question is whether the countries will listen to the fund. They’ve invited the fund in, so that means they have some sort of obligation to at least listen more than they’ve done in the past."
Some said the financial crisis threatened to render the IMF irrelevant. Is it gaining or losing power now?
In the first year of the crisis, the fund was not particularly there. No one was borrowing, although they were pretty proactive in their advice, but not a lot of countries were listening. A year ago, the fund got very much more involved. Its resources have been vastly augmented, and they’ve promised further increases in resources. It has made $160 billion in financial commitments since last September. It has gone from a $250 billion institution to a $1 trillion institution. That is recognition that the fund has an important role to play on the financing side and a bigger set of responsibilites to manage, coordinate, and promote cooperation on economic policies. So the fund is a much more relevant and central institution than it was three years ago.
Would the IMF try to replace the role of U.S. dollar as a global currency reserve with its new currency, the Special Drawing Rights (SDR)?
The IMF is us, meaning all of us, not just the United States, but 185 countries. My view is that very few of the 185 countries, and probably not even China itself, want to do that because the constraints on their own policies would get very tight. If you want to have a really tight system, like what existed under Bretton Woods, which was all based on gold, you can do that [with SDRs] but the system would have to have some adjustment process. You can’t have countries running huge deficits all the time as much as they want or hold huge surpluses as much as they want or the system breaks down.
The IMF recently approved the sale of 400 tons of gold reserves to boost its lending to poor countries. What impact will this have on developing countries?
The principal use of the gold is to create an endowment on which the fund could earn income to pay its administrative expenses, because traditionally the fund has financed its operations and staff out of its lending operations. The spread between the borrowing rate and the lending rate generates income, which is used to pay the staff. Although lending is an important function of the fund, it’s not everything. So what they’re doing is creating an endowment that will help pay for their public goods expenditures. Then there will probably be some extra income used to underwrite some of the lending or pay down some of the cost of lending to the poorest countries. But it’s a relatively small component of the total package.