The International Monetary Fund’s (IMF) legitimacy and status must be strengthened now so that it can be an effective manager when the next global crisis breaks out, urges a new Council Special Report. “Economic and financial conditions can change with alarming speed, and crises are bound to recur,” warns report author and Council Senior Fellow Peter Kenen, a renowned economist. “It would be far harder to reform the Fund in the midst of a new crisis than to do so now. It is easier to modernize a fire brigade when there are few fires than in the midst of a major conflagration.”
Founded after World War II, the IMF’s original purpose was to govern a monetary system based on fixed exchange rates among mostly industrialized countries. Today, its primary function is crisis management and the majority of members are developing countries, ranging from large, emerging markets to small, impoverished states. And yet industrial countries still dominate the decision-making process even though they have not borrowed from the IMF in more than twenty years. This development has been a significant catalyst for calls for reform.
“An institution will lack legitimacy if its members believe that it is dominated by a handful of large countries mindful of only their own immediate interests—and that is the principal risk facing the Fund,” says the report, Reform of the International Monetary Fund. Strengthening the IMF depends largely on the adoption of a set of reforms proposed by the IMF’s own managing director, Kenen writes, chief among these: reforming the quota system used to determine members’ voting power. “The proposed reform is inspired in large part by the emergence of large middle-income developing countries such as China and India, which now play a major role in the world economy but which (like the low-income developing countries) are underrepresented in the Fund.”
Kenen notes that countries with a large number of votes, like the United States, could feel threatened by the proposed reform, but argues that they should not. “A larger role for the developing countries—a key objective of the plan to overhaul the Fund—will not impair the influence of the United States. Rather, it will enhance that influence insofar as it increases the effectiveness of the IMF and enhances the Fund’s role in the stabilization of the world economy and the resolution of disputes like those that have arisen from global imbalances.”
The report, produced by the Maurice R. Greenberg Center for Geoeconomic Studies, provides a history of the IMF’s structure and practices, and offers an assessment of additional proposed reforms, endorsing some, criticizing others, and urging a more aggressive role in confronting global imbalances.
Many countries remain at risk for financial crises, and a strong IMF that can take the lead in responding is in the interest of the U.S., concludes the report. With well-managed reform, the IMF could play a useful role in resolving global economic imbalances.
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