A major driving force behind the IMF’s strategic review is the increasing international integration of the world economy, involving a larger-scale global transfer of goods, services, technology jobs, and finance. This has allowed world savings to be allocated to more productive and diversified investments internationally, but it has also created new risks, especially for emerging markets and advanced economies, by giving rise to increased capital flows and allowing the buildup of large-scale payments imbalances. Increased financial integration has enabled the United States, in particular in recent years, to finance much larger current account deficits than were seen in the past.
There is a broad consensus among policymakers around the world on the measures required to reduce global imbalances. Most policymakers agree that what is needed is fiscal adjustment and measures to stimulate private saving in the United States, exchange rate appreciation and measures to stimulate domestic demand in emerging Asia, and structural reforms to stimulate demand and improve productivity in the nontradables sector in Europe and Japan. One question raised in the course of the strategic review, partly in the context of the global imbalances, is how the IMF’s surveillance can be made more effective.
Global surpluses matter too
Lawrence Summers, a former U.S. Treasury Secretary, said in a speech at the Reserve Bank of India in Mumbai in March that the IMF now needed to pay as much attention to countries that had surpluses as to those with deficits. “The IMF has always had as its raison d’etre addressing imbalances, but its surveillance and, indeed, its lending have always been focused on those who are borrowing excessively.”
He said that the IMF must also strengthen its role in exchange rate surveillance. “It has always struck me as ironic that the IMF, which is charged with maintaining the global financial system, and therefore should be particularly focused on policy choices that affect multiple countries, is prepared to address domestic monetary and fiscal policy choices, which, while they may have international ramifications, are primarily of domestic concern, but is so reticent about addressing exchange rate issues, which by their very nature are multilateral.”
“Good [global] economic performance rests on a shaky foundation, because of large and continuing global imbalances.”
—Rodrigo de Rato
U.S. critics have pointed to what they see as undervalued exchange rates in certain Asian countries that have enabled them to boost exports and build up large foreign exchange surpluses. Mervyn King, Governor of the Bank of England, argued in a speech in India in February that IMF surveillance needed to focus more on balance sheets and be more independent and that greater independence for IMF management and staff would be served by making the Fund’s Executive Board a part-time, nonresident body that would hold management accountable.
David Dodge, Governor of the Bank of Canada, has said that the IMF needs to be more of an “umpire for the world economic order, unafraid to call out countries that aren’t playing by the rules.” At a speech in New York in March, Dodge proposed retooling the IMF to make it the global institution responsible for coordinating market-friendly reforms around the world and for issuing warnings when countries fail to heed danger signs in their own economies.
IMF Chief Economist Raghuram Rajan, meanwhile, has warned that reform at the Fund must be coupled with a recommitment by member countries to the idea of multilateralism. De Rato agrees that the IMF must enhance its focus on exchange rates and argues that the focus of surveillance must be sharpened, especially for the larger, systemi-cally important economies, “to make it more useful and also more challenging to governments.” In a speech at the Harvard Business School on April 4, he argued that the IMF needed better mechanisms for consultations with more than one member government at a time. “Global imbalances are the problem not just of one country but of many,” de Rato declared, having noted that “good [global] economic performance rests on a shaky foundation, because of large and continuing global imbalances.” He said the Fund could adopt a new multilateral consultation procedure for groups of countries, such as the European Union, the Gulf Cooperation Council, and the ASEAN+3—the Association of Southeast Asian Nations (ASEAN) together with China, Japan, and Korea.
The articles about reform at the IMF were prepared by Jeremy Clift, Elisa Diehl, and Ina Kota, with the assistance of Kelley McCollum. Illustrations by Massoud Etemadi.