Directions for Reform of the International Monetary Fund

1. Directions for Reform of the International Monetary Fund Presentation by Timothy Lane (IMF) Oliver Smithies Lecture Hosted by Balliol College in association with Oxonia and Department of Economics 11 November, 2004

2. Two main sets of issues which are intertwined • What does the IMF do? • How is it governed? The first lecture focused on first set of issues (the IMF’s role); the second lecture will link these with the second set of issues related to the decision-making process.

3. Some areas of tension in existing role • Conditionality • Prolonged use • Emerging market crises • Low-income countries

4. Some key tensions • Parsimony versus comprehensiveness • Selectivity versus pressures to lend • Bailins and bailouts—need for clear principles versus pitfalls of predictability • IMF financing as a signal • “Ownership”

5. Existing governance structure • Member country quotas determine: • Share of financing provided • Normal access to financing • Voting rights • Board of Governors • 85 percent majority required for major (“constitutional”) changes—implies de facto US veto • International Monetary and Financial Committee • Executive Board—24 Directors, appointed or elected

6. Governance of day-to-day operations • Executive Board • Approves IMF financing to particular countries (including new arrangements, reviews, and waivers) • Makes policy assessments in surveillance context • Approves general policies • Approves budget • Management and Staff • Management consists of Managing Director, 3 Deputies and their offices • Staff work in area, functional, and support departments • Staff develops specific proposals which management approves and are submitted to Board for decisions • Management responsible for internal resource allocation, organization of work, etc.

7. How are decisions made in practice? Example: financial arrangement for Macedonia • Pre-mission discussions, analysis • Briefing paper: preparation and review (Intra- and interdepartmental review, management approval) • Discussions with authorities • Staff report: preparation and review • Board discussion and decision • Authorities implement policies, draw financing

8. Constraints on the process • Policies and procedures: e.g. access policy, conditionality guidelines, facilities; designed to provide uniformity of treatment, consistency in approach • Review process • Need for agreement with country authorities and Board approval • Even once an arrangement is approved, it is a decision by the IMF but not (formally) a commitment by the country • The country can stop implementing the program and stop drawing the money (and this often happens) • And if the authorities do not fully implement the envisaged program, waivers and reviews provide a means to continue financing • Financing assurances: • Official creditors and donors • World Bank • Private creditors

9. Features of process • Discretion (e.g. in designing program, setting conditionality, determining access) is constrained by internal review and Board approval • Board decisions based on consensus—differences reflected in language of concluding remarks; staff work “in shadow of” the need for Board approval • Key Board documents now presumed to be made public, if authorities agree (and in an increasing number of cases, they do) • Many cooks—difficult to identify who is responsible for a particular outcome

10. Collaboration with World Bank and other agencies • Financing assurances • Overlapping areas of responsibility and spillovers from one policy area to another • Need for collaboration—recent steps to strengthen procedures (“lead agency” principle, upstream consultation) • Cross-conditionality: • legally, each institution responsible for its own financing; • but in practice, each institution’s financing decision depends heavily on the other’s financing as well as the analysis underlying that financing • this element of joint decision-making is particularly important for IMF and World Bank in low-income country (PRSP) context • but it’s also relevant with respect to other agencies (donors, etc.) in other contexts

11. What is different in handling higher-profile country cases and policy issues? • Time pressure often more intense • More (and more senior) people involved throughout • Informal briefings of Board • Sometimes staff meet with individual Executive Directors or groups, or with groups of officials • More public scrutiny; Civil Society involvement esp. over policy issues • Greater likelihood that other players are involved and need to be consulted • In some cases, influence via more indirect channels • Political considerations may be more important

12. Some issues • Voice and representation for developing countries • Disproportionate influence of some large countries • How is governance exercised? • Accountability for decisions

13. Voice and representation of developing countries • Voting structure • Rationale for existing structure • Reasons for change: debtors disproportionately affected by IMF, esp. with more pervasive conditionality, standards and codes, etc. • Increasingly sharp division into creditor and debtor countries • It’s not just the votes: developing countries’ influence is also affected by: • Supporting resources • Multi-country constituencies • Access to HQ staff • Informal pact for selection of Managing Director

14. How to increase developing country share • Apply existing formula: would increase voting power esp. of emerging Asia (esp. China), reduce that of Europe • Take account of population: China, India big beneficiaries • Increase basic votes: would help small countries esp. in Africa

15. Large-country influence • Facilitated by • voting power • nature of decision-making process • role in supplementary financing • location • Whether and how influence exerted depends on issue

16. Alternative forms of governance • Two polar models: • Direct control: all decisions made by member governments (or their representatives); staff and management do nothing without member countries’ approval and are thus responsible only for executing the decisions • Accountability: member countries set clear objectives, give staff and management power to achieve them, and hold them responsible if not achieved • Present governance structure involves a mix of these elements—but is it the right mix?

17. Arguments for move toward greater reliance on accountability • Adverse implications of political influence in cases of • prolonged use • bailouts, bailins in capital account crises • proliferation of conditionality (either as flipside of lack of selectivity, or favoring specific interests) • Dynamic inconsistency—need to build institutional reputation • Potential loss of focus, tendency toward proliferation of objectives as politically-controlled Board is responsible for minute details of decision-making • Difficult to establish where the buck stops • Limited voting power of developing countries is more of a problem when control is exerted directly

18. How could direct political control be reduced? • Smaller Board, more elected Directors, fixed terms • Further increases in transparency • Would need to be accompanied by • Establishing other forms of accountability—so that the result would not be to establish a free-standing bureaucracy • Greater reliance on uniform rules and standards • Clearer delineation of field of operations • To have a chance of success, reforms would need to increase the institution’s effectiveness in a way that most member countries would see as desirable

19. Accountability • 3 main elements needed: • Clear, limited objectives, achievable with powers allocated • independent information on whether objectives have been achieved • framework for action in response to this information

20. Possible indicators of the results of IMF actions • Macroeconomic outcomes (growth, inflation, poverty) • But the IMF does not control these • Incentive to shun countries that most need IMF support • Deviation of outcomes from projections • Could be useful in disciplining projections (although it would push toward greater pessimism) • Incentive not to intervene in risky situations • Intermediate outputs (e.g. number of lending programs, amount lent, documents issued, etc.) • Is more directly controllable by IMF • But adverse incentives if quality not measured (e.g. churn out loans) Thus, while indicators provide useful information, they’re unlikely by themselves to provide an alternative to existing governance framework

21. Another way of evaluating performance: independent assessments • Independent Evaluation Office (IEO)—a possible model: • Generally headed by outsider, separately staffed • Independent of staff and management, reports to Board • about 3 major reports per year • Evaluates only programs that have been completed—no involvement in ongoing operations • Work program, issues papers, evaluation reports, Board reactions made public, comments invited • Not intended to be part of governance structure, but to contribute to “learning culture”

22. How could evaluation go beyond the IEO’s current role? • Evaluate Board as well as staff and management decisions—would require independence from Board • More uniform coverage of evaluations • Clearer criteria for evaluation • Explicit link to governance

23. But significant degree of political control may be inevitable • Inherent limitations to ability to establish other methods of accountability • Realistic that countries would want some direct involvement, given issues that are often at stake • Political involvement gives clout to IMF decisions

24. Conclusions • The IMF’s governance is critically important, but the voting structure is only the tip of the iceberg • Move toward less direct political control may be desirable • But would depend on establishing clearer accountability for decisions—and this is a very difficult problem