[DEBATE] : IMF Fails to Make Progress on Reforms

[Riaz K. Tayob]

IMF Fails to Make Progress on Reforms

By Chris Giles and Eoin Callan
Financial Times, London
Sunday, October 21, 2007

http://www.ft.com/cms/s/0/e2d8b350-7f8d-11dc-acce-0000779fd2ac.html?ncli...

WASHINGTON -- Rodrigo Rato bowed out as managing director of the 
International Monetary Fund at the weekend with effusive plaudits from 
world financial leaders in public but sharp criticism of his role and 
the Fund's relevance from the same people when talking outside official 
news conferences.

The emerging consensus among rich and poor countries alike was that the 
reform process of the IMF had moved backward. Worse, they added that 
acrimony over the Fund's role in assessing the economic policies of its 
members, their effects on other countries threatened to create just the 
disorder in the global economy it is intended to prevent.

"We didn't make any progress this weekend," said an irritated David 
Dodge, the Canadian central bank governor, adding that it was a "pretty 
big disappointment" and that IMF stakeholders had not "settled even the 
principles let alone the details" of institutional reform.

The communique from the International Monetary and Financial Committee, 
the IMF's governing body, put a brave face on the lack of progress in 
making the Fund more legitimate around the world by increasing the voice 
given to emerging and developing countries. It said that the new formula 
for voting shares at the IMF would be most strongly linked to a 
country's economic weight in the world, but it would also reflect the 
living standards in different countries and the minimum number of votes 
given to every IMF member would at least double.

Mr Rato presented this as an achievement, but many other delegations 
privately agreed with Mr Dodge. Emerging economies are aggrieved that 
one of the aims of the Fund's medium-term strategy was to increase the 
legitimacy of the organisation, but the two big decisions of recent 
months -- who would be the new managing director and who would chair the 
IMFC -- were stitched up by European countries behind closed doors.

Senior officials in group of seven countries told the Financial Times 
that the reform process would have to start again under Dominique 
Strauss-Kahn, the new IMF managing director who takes office at the 
start of November.

The IMFC announced it welcomed progress in strengthening surveillance of 
countries' economic policies and spillovers from one country to another. 
"The committee looks forward to review the progress and experiences in 
these areas," the communique stated. But the IMF's new surveillance 
policies -- in particular trying to be an umpire in determining when one 
country's exchange rate regime is having a detrimental effect on other 
economies -- are also causing acrimony.

China, the country most likely to fall foul of the new procedures, voted 
against the new surveillance rules and since the rest of the global 
community, through the IMF, cannot force a country such as China to 
change its policy, the new rules have only served to heighten tensions.

Morris Goldstein of the Peterson Institute for International Economics, 
said that there was a serious risk of widespread conflict between 
emerging and advanced economies in the years to come. "What you are 
seeing with China and the US is just the tip of the iceberg," he said.

Mr Dodge said: "This is precisely the time we need the fund's ability 
and skills to deal with global imbalances," adding that the breakdown in 
reform efforts had decreased the "chance of coming to a common view 
across the fund's membership" on currency policy.

"The longer the imbalances go on, the greater risk that we will end with 
a rather messy dénouement," he said.

The IMFC put a brave face on the dissent that was within its ranks. 
Rather than concede that problems exist, it repeated the message from 
Fund officials over the past week that the global economy was still 
growing strongly, although it will be slowed by the credit squeeze.

The finance ministers and central bank governors who sit on the IMFC 
agreed that all relevant national and international bodies should study 
possible improvements for risk management in complex financial products, 
the accounting of off-balance sheet vehicles in banks, the work of 
credit ratings agencies, and the regulation of liquidity in financial 
entities.

Jean Claude Trichet, the head of the European Central Bank, said: 
"Certain areas of the regulatory framework may need to be reviewed, such 
as the treatment of liquidity risk and securitisation framework, in 
particular the treatment of liquidity exposures to special purpose 
vehicles and the assessment of risk transfer, given their significance 
in the recent financial turbulence."

Unlike the G7 rich countries, they did not quite call for China to let 
its currency appreciate, although the IMFC repeated its call for 
"greater exchange rate flexibility in a number of surplus countries."