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An AgendA for the reform

of the InternAtIonAl

monetAry fund

Jack Boorman


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An AgendA for the reformof the InternAtIonAl

monetAry fund

Jack Boorman

November 2007


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AN AGENDA FOR REFORM OF THE INTERNATIONAL MONETARY FUND

JACK BOORMAN1

November 8, 2007

The International Monetary Fund is acing an uncertain uture. Notwithstanding

the important contributions it has made in helping the global economy deal with

major economic and inancial changes and crises over the past 25 years, its role is

now questioned. New lending by the Fund is negligible; its role as policy advisor

to member countries seems diminished; and its oversight role in ostering stability

in the international monetary system is uncertain. Eorts to reorm the Fund and

to better deine its place in the global economic and inancial system have been

underway or some time. The most recent attempt at reorm began in the context othe Medium Term Strategy (MTS) announced by Rodrigo de Rato, the then managing

director, and endorsed by the International Monetary and Financial Committee

(IMFC) in April 2006. Some successes have come rom those eorts. However, a

great deal remains to be done, both on issues elaborated in the MTS and on matters

well beyond the scope o that strategy. Progress will require the ull commitment

on the new managing director, Dominique Strauss-Kahn. This paper will review the

major items that are, or that should be, on the agenda or reorming the IMF. In

certain areas, speciic reorm proposals will be suggested; in other areas, ormulating

concrete proposals and securing the necessary political support will require much

more debate and discussion than has taken place to date. On these latter issues, thepaper will present background and diagnostics rather than speciic proposals as a

way o advancing those discussions.

The major elements o reorm must include the ollowing:

I. More clearly defining the role of the IMF in the emerging global economic and

financial system.

This will need to be done with agreement among the broadest possible segments o

the membership and will require, in particular:

a. Clariying the monitoring and surveillance role o the Fund both

surveillance over the global system, including inancial markets, as well as

over the economies o individual member countries;

b. Forging broad agreement on the Funds inancing role, and the acilities and

the resources needed to ulill that role; and

c. Seeking broader consensus on the overall role to be played by the Fund in

the low income countries.

1 Former Counselor and Special Advisor to the Managing Director, and Former Director o the Policy Developmentand Review Department, International Monetary Fund.


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II. Modifying and improving critical aspects of the governance of the Fund,

including:

a. Pressing orward with a new energy, and a ar more ambitious agenda, the

alignment o member country quotas and voting power with the realities

o the emerging global economy and the place o each member in that

economy; going beyond quotas and voting power, but within the context

o that discussion, to some o the other actors that determine the voice omembers in the Fund. This will involve, inter alia, the size and composition

o the executive board and the quality o representation o member countries

on that board.

b. Reexamining the responsibilities and accountabilities o those charged with

over-seeing and running the operations o the Fund. This will require, in

particular, more active application o the principles o good governance in

the Fund; and

c. Finding a better alignment between the structure o and representation in the

various agenda-setting bodies the G7/8, G20, et al, and the coniguration

o the governing boards o the international inancial institutions, including

the IMF. (This is obviously a longer term issue and is well beyond the

inluence o IMF management alone.)

III. Reviewing the management structure of the Fund, as well as the mechanisms

to assess the responsibilities and accountability of management. And,

IV. Radically altering the Funds income model to assure sustainable funding

regardless of the level of the Funds lending operations.

This is a massive agenda comprising a large number o issues, many o which are

deeply intertwined. For example, better deinition o the role o the Fund will

inluence the appropriate size and skill mix o the sta and, thereby, the cost o

running the institution and the easibility o certain income models to cover the

associated costs. Agreement on the potential inancing role o the Fund is necessary

to determine the appropriate size o the inancial resources o the Fund and global

quotas. Thus, there needs to be a better sequencing o debate on these issues than

has been the case in recent discussions. At the same time, some o the needed

reorms are generally independent o the resolution o these other issues, and some

are urgent. On the top o that list is reorm o management, which should be the

highest priority o the new managing director and o the executive board.

This paper will take up, in turn, each o the issues listed above.


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I. The Role of the Fund

The Fund has made major contributions to the resolution o problems that have

conronted the global economic and inancial system over the past several decades.

These have included the oil crises o the 1970s; the emerging market debt crises o

the 1980s; the integration o the transition economies o Eastern Europe and the

ormer Soviet Union into the global system in the 1990s; the long-smoldering debt

crises o the low income countries, culminating in the HIPC Initiative in the 1990s;the Mexican, Asian, Russian, Turkish and Latin American crises o the mid and later

1990s and early years o this decade; and, the establishment, implementation and

assessment o standards and codes over the past decade. The Funds role was central

in each o these events.

At the same time, however, the way in which the Fund has gone about some o

its activities has been questioned. Critics, as well as some supporters o the Fund,

have oered a laundry list o ways in which the institution is said to have expanded

its activities well beyond its original mandate while, at the same time, coming up

short on the job it is supposed to perorm under the original Articles o Agreement

and the Second Amendment. The list includes a widening, and alleged weakening,

o the ocus o its surveillance activities; straying into areas in which it had little

expertise or an uncertain mandate;2 the broadening o the ocus o its work in the

low income countries; the breadth o the structural conditionality included in

inancial arrangements with member countries; and an unnecessary prolieration

o the acilities or providing inancing to countries seeking its assistance. There has

also been criticism that the institution has not been doing, or not doing suiciently

well, some o the things that it should be doing perhaps distracted by its activities

in the areas peripheral to its core mandate. The responsibilities on which it is said

to all short include the monitoring o or, more importantly, the orce o its policy

advice regarding global imbalances, a key threat that has conronted, and continues

to conront, the global economy;3 its lack o inluence over the policies o the larger

industrial countries; an insuicient involvement in global inancial sector issues;

and the lack o engagement with emerging market economies on some o the policy

issues o greatest concern to them, including on the practical aspects o managing

their exchange rate regimes and the opening o their capital accounts.4 These issues

go to the heart o the Funds surveillance responsibilities.

a. Fund Surveillance

Notwithstanding the identication o some o these issues in the Medium Term

Strategy, better direction is needed to improve the Funds contribution to member

countries in their policy choices, including those made to conront the challenges o

2These include activities such as the work related to money laundering and combating the nancing o terrorismand the coverage o certain social issues in the context o Article IV consultations. The Funds Legal department alonereportedly devotes 25 sta and contractuals to the ormer activity.3While the imbalances may be declining, the residue o those imbalances in the excessive reserves held by somecountries, the explosion o sovereign wealth unds, etc. pose new challenges to the global nancial system.

4This is not the ot-heard critique that the Fund orced countries into premature liberalization o their capital accounts.That ction was put to rest by the study done by the Funds Independent Evaluation Oce. Rather, the more recentcritique is aimed at the lack o capacity among sta to give practical advice to member countries on their exchangerate regimes and on the best policy path or integrating banking and nancial systems into the global economy. See:IEO Evaluation o Exchange Rate Policy Advice 1999-2005, May 17, 2007 and the IEO Report on the Evaluation o the IMFsApproach to Capital Account Liberalization, April 20, 2005.


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globalization, as well as to the stability o the global economic and nancial system

and the responses o member countries to the major changes underway in that

system. For example, some question the Funds eectiveness both beore and since

the launching o the multilateral surveillance initiative in containing the potential

threat to the global system rom the persistent imbalances o the past decade.5 In

this context, critics have asked where the Fund stands in viewing the enormous build

up in reserves that has taken place in recent years in refection o these imbalances

and what it has done to contribute to an understanding o the implication othose reserve levels, and their investment, both or individual countries and or the

system. Similarly, the Fund has been aulted or the lack o precision in its advice to

countries regarding exchange rate and other policies, including those o the countries

contributing most to the global imbalances. Perhaps most importantly, it has also

been criticized or its slow adjustment rom a mostly macroeconomic ocus in its

work to a broader view encompassing the dynamics o nancial markets. Despite

the creation o new departments and the reorganization o others, there continues

to be a silo mentality within the institution. This results in an undue ocus o the

sta on the problems and issues o their own department and an insucient synergy

o work across departments. This has, at times, prevented the best mobilization and

integration o sta in dealing with critical issues. The Fund has an extraordinary base

o experience in helping countries conront economic and nancial policy challenges.

But that experience has not always been brought to bear as well as it might have been

in providing advice to member countries or in assessing the implications o emerging

tensions or the global system. In particular, and despite recent eorts, there remains

a need or a genuine integration o nancial sector issues with the world class macro

economic analysis that has been the hallmark o the Fund over its entire history.

To be air, the Fund has been a player in all these debates, and has taken a number o

important steps to better align the organization and the skills o its sta to the realities

o globalized nancial markets. Most observers continue to give the Fund and its sta

high marks or its analytic capacity and its increasing amiliarity with institutional

issues in the nancial sector to address such problems. The issue turns, rather, on

the timeliness, orce and eectiveness o its advice, the positions it has taken as the

pre-eminent arbiter o macroeconomic policy issues in the international system, its

pace o change in the ace o major developments in global nancial markets, and

its capacity to provide practical policy guidance to its members. Changes in some o

these areas could come more quickly, but require a willingness and support rom

the membership at large to be more candid, more specic, and more orceul in

its recommendations to all member countries, including the largest.6 In other areas,

change will be evolutionary, but should occur in the context o a vision o the role o

the Fund more specic, and more widely agreed, than that elaborated thus ar. 7

5 See IMF, Press Release No 07/72: IMFs International Monetary and Financial Committee Reviews Multilateral Consultation,April 14, 2007.6 Perhaps the multilateral surveillance initiative holds promise: that remains to be seen. A positive aspect o theinitiative is, as John Lipsky, the First Deputy Managing Director has said, that it allows the countries most interestedin and aected by an issue to be at the table rather than having the G8 or some other predetermined group preside.However, the recent exercise seemed to suer both rom the near co-incident establishment o regular United States/

China bilateral discussions o economic issues and rom the rejection by the Chinese o the decision revising the 1977Decision on Fund Surveillance. Surely the latter episode needs review and reconciliation.7The extent to which the worlds perception o the Funds role has become clouded is evident in a recent columnby Jerey Gartner in the Financial Times (October 11, 2007). In discussing how to prevent a rout o the decliningdollar, he advises, inter alia, undertaking a thorough examination o the uture o the dollar in the internationaleconomy He would assign that task to the Bank or International Settlements (BIS). He never mentions the IMF.


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b. The Financing Role o the IMF

Overriding these speciic questions is a broader debate about the ocus o the

Funds work and the allocation- and size- o its sta resources. On one side o this

debate are those who see the Funds primary, or sole, responsibility as surveillance

monitoring and providing advice on both individual country economic and

inancial developments as well as on developments across regions and the entire

global system. Some o those arguing or this narrower mandate premise their viewson what they see as the limited need or the IMF to play a inancing role in the new

world o huge and luid private capital markets. Others, however, see a continuing

need or the Fund to be prepared to provide inancing to member countries in the

event o a crisis aecting either an individual country or, indeed, a region or the

global system.

It is telling that the emerging market countries a growing constituency within the

Fund, continue to argue or a readiness on the part o the Fund to provide contingent

or insurance inancing, while some o the major industrial countries - countries that

are unlikely ever to come to the Fund or inancing, argue or giving up the Funds

inancing role. The major emerging market countries have been in a sweet spot in

the global economy in recent years. This has been the result o high commodity

prices, robust growth in much o the world, high global savings rates contributing

to low inancing costs, and the availability o huge amounts o capital rom the

major surplus countries (China and much o Asia, as well as the major oil exporting

countries).8 These conditions, together with much better policies relecting, in part,

the lessons learned rom the Mexican, Asian, Argentine, Brazilian, Russian, and

other crises o the second hal o the 1990s and the early years o this decade, have

changed the situations o these countries dramatically, not least, putting them in

much stronger positions to weather any disturbances or crises that may occur.

The reality, o course, is that the actors contributing to this sweet spot are unlikely

to last and unoreseen events are likely to create a situation in which the IMF will be

called upon again to provide distress inancing to some o its members.9 It is also

clear that not all members have ound that sweet spot. There are other emerging

market economies, in Eastern Europe or example, that are in much less robust

economic and inancial conditions that could be vulnerable in a less avorable

international economy. Moreover, there are new emerging market economies

arising that need both helpul dialogue with and policy advice rom an institution

with the experience o the IMF, as well as possible inancing rom the Fund in the

event o problems. The world would do well to listen to those potentially most

in need o IMF inancing when deciding the role o the Fund in this important

area. It would do well, also, to draw lessons rom the recent crisis in the sub-prime

mortgage market in the U.S. that surprised many in its impact in other countries and

in other markets, such as the inter-bank and the commercial paper markets. This is a

renewed reminder that crises can come rom unexpected corners and spread rapidly

in unoreseen ways. Only dreamers can believe that the days o inancial crises,

including those that would warrant intervention by the IMF, are over.

8 Jack Boorman, Global Imbalances and Capital Flows to Emerging Market Countries, Emerging Markets Forum, September,2006.9 The recent period o very low lending activity by the Fund is by no means unique in the Funds history, and, likeearlier periods, will not last orever.


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A new acility designed to provide insurance to emerging market countries in a

global system characterized by these kinds o risks needs to take these realities

into account. I a consensus can be ound on the inancing role o the Fund,

new acilities, such as a revised contingent credit line or insurance mechanism,

will likely be required or it to properly ulill that role. Creating such a acility

will be no easy task. There remains no irm agreement among the membership

regarding the conditions under which the Fund should be prepared to lend

large resources (exceptional access relative to quotas) to a member country.Similarly, the problems that bedeviled, and ultimately sank, the Contingent Credit

Lines (CCL) remain unresolved. These include, besides access levels, the trade

o between automaticity in drawings and the conditionality to be associated

with such drawings. They also include the diicult issues surrounding the likely

market reactions to either the approval or the denial o access to such a acility

or a member country. The other inancial acilities o the Fund are, o course,

available to emerging market (and other) countries. However, a true insurance-

like acility may better meet the needs o these countries in the new global system

o extraordinarily luid debt and capital markets.

These are critical questions conronting the membership, and the divisions among

members about the Funds size, about exceptional access in the context o capital

account crises, and on related issues need to be reconciled. Agreement should be

sought on these issues beore urther deliberations on the appropriate volume o

inancial resources or the Fund and the needed increase in quotas to provide those

resources.

c. The Role o the Fund in Low Income Countries

Beyond crisis inancing or emerging market economies (and, possibly, though

much less likely, or some o the more developed economies), there is a major issue

regarding the role o the Fund in the low income countries. Financing has been an

important aspect o that role since the 1970s. There are some who argue that since

the Fund is not a development institution, it should not be lending to developing

countries or, more narrowly, that it should not be lending or development purposes.

The ormer argument, in particular, seems specious, and one that is unair to the

developing country members o the Fund, who have a right to expect inancial

support in appropriate circumstances. Many o these countries continue to have

problems building and managing reserves. Many, even those with large aid inlows,

may temporarily run balance o payments deicits o the kind that the Fund was

conceived, or has evolved, to help ameliorate. This is not to say that i the G8 countries

and other donors were to come orward with the volume o aid lows promised at

Gleneagles at the G8 summit in 2005,10 and i commodity exports o many o even

the poorest developing countries continue to be as buoyant as they have been in

recent years, there would not be less need or Fund inancing or these countries.

But that in no way suggests that it would be wise to close down the Funds capacity

to lend, on appropriate terms, to these countries or to shit the capacity or such

lending that now exists in the Fund to another institution such as the World Bank.11

10 See the communiqu rom the G8 Summit at Gleneagles, Scotland, 2005.11 One approach to this issue is contained in The Report by the External Review Committee on IMF World BankCollaboration (the Malan Report), February 23, 2007, which suggests that the Fund provide only short-term credit tothese countries leaving all longer-term lending to the World Bank.


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Fortunately, there is generally broad agreement that the macroeconomic stability,

and associated growth, seen in many o the poorer countries over the last decade

owes something to the advice provided by the Fund to these countries, most oten in

the context o Fund inancing arrangements. This capacity should not prematurely

be taken away.

But two other issues must be conronted in this debate over the role o the Fund in

the low income countries. The irst is the conditionality sought by the Fund whenlending to these countries. The second concerns the scope o the Funds analysis

and involvement in the economic, inancial, and social issues conronting these

countries. The conditionality debate has gone on or years, but there is broader

agreement now - even among many o the Funds critics, that conditionality,

especially macroeconomic conditionality, is both legitimate and can be helpul to a

country as well as protective o the Funds inancial resources. The conditions or

assuring the eectiveness o conditionality not least ownership o policies by the

government and aected segments o society, are now better understood. There is

also broad agreement that the Fund should both limit the structural conditions it

attaches to its inancing and concentrate them in the core areas o its expertise, e.g.,

iscal and budgetary systems, inancial markets, etc. and leave to others, especially the

World Bank, areas such as civil service reorm, privatization and the like.12 Debates

about how to make limited and ocused structural conditionality more eective

and less intrusive should, and will, continue. While care needs to be taken to assure

uniormity o treatment across the membership, it is clear that such conditionality

needs to be well tailored to the circumstances o each member: its track record

in policy-making; its record under inancing arrangements with the Fund; and

the extent and depth o ownership o the adjustment and reorm measures being

implemented with Fund support. Beyond these issues, broader agreement needs

also to be ound regarding the appropriateness o using crisis situations to bring

about changes in the institutional and structural characteristics o the economy that

may have contributed to the emergence o a crisis something or which the Fund

was widely, but wrongly, criticized or during the Asian crisis.

The second issue regarding the Funds work in low income countries concerns the

breadth o the Funds analytic ocus and collaboration with other agencies. Much

greater clarity and better guidance to sta are needed rom both the executive board

and rom management on these issues. What inormation, and in what detail, is

needed to do macroeconomic analysis properly and comprehensively in developing

countries? What should be the time horizon o the Funds analysis and projections?

Has the Fund a role to play in mobilizing or coordinating aid and assessing its

overall impact on the economy? What is the proper role or the Fund in assessing a

countrys progress toward achieving the Millennium Development Goals?

Enormous eorts have been made, and continue to be made, both within and

outside the Fund to bring closure to these issues. Some argue that the Fund should

have a narrow and relatively short term macroeconomic view o the countys

prospects and policies. Others believe that the Fund should help provide the

overall macroeconomic context over a somewhat longer time period within whichthe countrys development plans will be ormulated and implemented. This was

12 See, or example, the Report on Structural Conditionality in IMF-Supported Programs, Independent Evaluation Ofce,International Monetary Fund, orthcoming.


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the concept underlying the development o the Poverty Reduction Strategy Paper

(PRSP) and its call or close cooperation between the IMF, the World Bank, and

other active partners o the county, including aid agencies, in determining the role

each is to play in assisting the country. For the Fund, this latter view implies a need

or ull inormation about the size and likely sectoral allocation o aid lows, an

analysis o the capacity o the country to absorb and eectively utilize aid, and the

impact o inancial lows, policies and other actors on the prospects or the country

to achieve the MDGs.13 All this needs to be set out in the context o a medium termmacroeconomic and inancial development ramework.

These contrasting views o the Funds role in the low income countries imply quite

dierent levels o involvement with the country, dierent degrees o cooperation and

active engagement with the countrys other partners, dierent inormation systems,

and dierent staing levels, among other things. Unortunately, neither the executive

board nor management have provided suiciently clear guidance to the sta about

where on the spectrum between these two models o Fund involvement they should

deine their role. This has led to conusion among sta, as well as conusion among

the countys other partners about what to expect rom the Fund. There is an urgent

need or greater clarity on the Funds responsibilities in this work.

The low income countries would be well-served by an IMF that takes a broad view o

its role in these countries. The IMF is the only organization that can eectively help

countries put together all the elements o macroeconomic and inancial analysis

that are needed to have a comprehensive view o the development prospects and

requirements o the country. In doing so, o course, it needs to rely on the expertise

and inormation available in other organizations, including aid agencies and the

development banks. The narrow view espoused by some simply does not recognize

the requirements or ormulating a comprehensive view o macroeconomic policy

in these countries.

These issues regarding the role o the Fund in surveillance, in inancing, and in its

work with the low income countries are critical to the uture direction o the Fund.

While each has been subject to debate over the past several years, there has been

insuicient progress in bringing closure to these issues and the work and reputation

o the institution has suered as a result. I the Fund is to re-gather its strength

among the membership and be seen as having a well-deined role under which it

can eectively partner with other institutions and agencies, and advise its members,

greater clarity on all these issues is essential.

II. The Governance of the Fund

A clear mandate, strongly endorsed across the membership, is needed or the Fund to

play its role in the global economic and inancial system. To secure that endorsement

and the support o the entire membership in carrying out its responsibilities, the

Fund needs to reverse the slide towards indierence that has been taking place among

large segments o the membership. This trend has been the result o a number o

actors, but probably none more important than those involving the governance othe institution. This, in turn, depends on the voice and vote o members individual

13 In the current situation in which a number o Arican countries are enjoying increased production and exports o oiland other commodities, absorptive capacity assessments become even more critical.


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countries, as well as the constituencies represented in the various regional and

issue-associated groups o members; the eectiveness o a countrys representation

in the institution, beyond the basic matter o voting power; and the congruence

between the governing bodies o the Fund and the various agenda-setting bodies in

the global community that are oten the ocal point o countries engagement in the

multilateral system.

a. The Voice and Vote o Member Countries

Clearer principles are needed to help guide thinking on global and institutional

governance issues.14 One o those principles on which virtually all agree is

legitimacy. Unless an organization has a legitimate basis, and is seen as legitimate

by all those involved with it, it will not have the authority and credibility to carry

out its mission. The search or legitimacy or an institution like the Fund starts by

asking what governance eatures make it acceptable or sovereign countries, and their

populations, to work with the organization and to give up some o their sovereign

powers in doing so. Without a willingness on the part o all members to cede some

authority to the institution, it cannot be eective. In the case o the IMF, it is clear

that the current distribution o quotas and the relative voice o members within the

Fund, among other things, are causing its shareholders in various regions o the

world, as well as other stakeholders, to question its legitimacy.15

Legitimacy, in the irst instance, stems rom the governance structure o an institution.

But is also depends on the way in which that structure operates. Thus, governance o

the Fund has many dimensions. The irst dimension centers on the issue o power-

sharing. This is mainly a matter o what is termed voice and vote. That issue is

under active discussion in the context o the current review o members quotas in

the Fund. Some progress was made on this issue at the Funds annual meetings in

Singapore in 2006 with the ad hoc quota increases granted to China, Korea, Mexico

and Turkey. Importantly, the resolution o the Board o Governors adopted at that

time recognized these ad hoc increases as only a irst step. The resolution called

on the executive board to reach agreement by the time o the 2007 annual meetings

on a new quota ormula to guide the assessment o the adequacy o members

quotas in the Fund and to provide a basis or a urther rebalancing o quotas to

be recommended to the Board o Governorsno later than by the annual meetings

in 2008. The executive board was also called upon to propose an amendment o

the Articles o Agreement to provide or at least a doubling o the basic votes o

each member and to saeguard the proportion o basic votes in total voting power.

It was also envisaged that the Board o Governors will consider distributing any

increase in quotas with a view to achieving better alignment o members quota

share with their relative position in the world economy, while assuring that the IMF

has adequate liquidity to achieve its purposes.16

It is, unortunately, unlikely that the action called or by the Board o Governors will

address the real and substantive issues o voice and vote in the Fund. First, on basic

14 See IMF Reorm: Congruence with Global Governance Reorm, Jack Boorman in Global Governance Reorm, editedby Colin Bradord and Johannes Linn, the Brookings Institution, January 2007.15 The anomalies in the voice and vote o members in the Fund are well known and need not be restated here.16 IMF Press Release No 06/205: IMF Board o Governors Approves Quota and Related Governance Reorms, September 18,2006.


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votes. In its report to the Board o Governors in August, 2006, the executive board

said that An increase in basic votes, which relect the principle o equality o states,

is the appropriate mechanism to give the smallest members o the Funda greater

voice in the Funds deliberations.17 This was an excellent starting point. When the

Fund was established in 1944, basic votes (under the same principle o equality o

states) were set at 250 votes or each member. At that time, these votes represented

11.3 percent o total voting power. Basic votes have not been changed since then

and, with the increase in quotas that has occurred over the years, now represent only2.1 percent o total voting power. While the resolution o the Board o Governors

called or at least a doubling o basic votes, language that was repeated in the

IMFC communiqu o October, 2007, it appears that agreement is emerging around

not more than a doubling. This would leave basic votes at only about our percent

o current voting power an insigniicant adjustment.

In a similar vein, the modiications to members quotas themselves, driven by

the adoption o new quota ormulas, looks to be less than ambitious. Perhaps

most noteworthy is the likelihood that inter-country trade between members o the

European Union, including members o the euro zone, will continue to be counted

as a measure o the openness o these economies. This is likely to leave the EU-25

with cumulative quotas o around 32 percent o the total almost enough or the

EU together with the United States to take majority decisions in the Fund. There are

legitimate legal and other issues here, not least the act that the EU is not a country

the entity that deines membership in the Fund. However, continuing to count

this inter-country trade within the Union when calculating quotas is becoming

increasingly akin to counting trade between Caliornia and New York and between

all the other individual states o the United States in determining the quota o the

US. I this issue cannot be dealt with through the elimination o inter-country trade

when applying the quota ormulas to EU countries, some other means, including a

voluntary reduction in quotas by EU countries that would achieve the same results,

should be considered.

Similarly, an overall increase in quotas the distribution o which was seen as a

means o achieving better alignment o members quota share with their relative

positions within the world economy - seems unlikely to produce much change. The

executive board appears to be considering an increase in the total quotas o only

about 10 percenta igure endorsed by the IMFC in its October, 2007 communiqu.

The entire debate on the quota issue is urther undermined by the act that it takes

place in an environment in which the uture inancing role to be played by the Fund

is uncertain and the dierences o view among the membership that arose during

the crises o the 1990s about exceptional access to Fund resources in the context

o capital account crises remain essentially unresolved.18 These issues should be

resolved beore any increase in quotas is recommended by the executive board to

the board o governors.

Clearly a dierent approach and a dierent process is needed i any review o quotas

17

Report o the Executive Board to the Board o Governors, Quota and Voice Reorm in the International Monetary Fund ,August 31, 2006, p.4.18 It is interesting that some o the same countries most vocierous in their objection to large access to Fund nancing inthe context o the capital account crises o the late 1990s and early 2000s are members o the Euro Zone whose centralbank, the ECB, has amously, and probably appropriately, fooded the money markets in the ace o the disturbancerelated to the sub-prime mortgage crisis o recent months.


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is to produce the kind o change needed to increase the perceived legitimacy and

useulness, o the IMF among large segments o the membership. At minimum, this

would require:

Commitment at the highest political levels to support genuine reorm and

change;

Resolution o the key issues regarding the appropriate inancing role or the

Fund in the case o inancial market crises;

Agreement to a signiicant increase in basic votes; something on the order

o a quadrupling would be needed just to restore the relative power o basic

votes to their position when the IMF was established; and

Acceptance that inter-country trade within the EU is not to be included in

calculating quotas or some other agreement is ound to bring about a

similar adjustment to the aggregate EU quota.

Beyond quotas, another aspect o the voice and vote issue is receiving insucient

attention. This involves the size and compositions o the executive board something

that certain segments o the membership are loathe to put on the agenda. Two

questions in particular need urgent consideration. First, is an executive board o 24

members the optimal size or an institution like the IMF and or a board that has the

operational responsibilities o the Fund board? Much o the literature on the subject

suggests smaller boards can be more eective. Second, what needs to be done to reduce

the indeensible position o the European countries in the executive board that now

occupy eight o the 24 chairs and are represented in one other constituency? This is

an historical anachronism that needs to be corrected. The enormous contribution o

the Europeans to the IMF, including their generosity in supporting the concessional

windows or Fund lending to low income countries, as well as other initiatives, needs

to be recognized. Nonetheless, the Europeans need to recognize that they hold the

key to genuine reorm on the voice and vote issues. They should accept a reduction in

quotas and they should agree to reduce their representation in the executive board to

no more than three chairs. Among other things, a reduction in the number o European

chairs would provide room or additional representation by Arican countries, 43 o

which are now represented by only two executive directors. Without a willingness on

the part o the Europeans to give ground on these issues, it is virtually impossible to

see how genuine reorm can be brought about in the Fund.

Will any o these, or other, changes make a dierence to the real and perceived

legitimacy and operations o the Fund? Europe may come out o such change

with a stronger and more eective voice. This would allow it more eectively to

counter the power o the United States. A genuine power shit in accord with the

economic and nancial realities o the global economy would provide the emerging

market countries with a greater sense o ownership in the institution. Substantially

enlarging basic votes could do the same or the low income countries, as would an

additional chair or the Arican countries. All o this could also aect the powerblocks and alignments that orm to determine the orientation and evolution o the

Fund as globalization continues to change the relative positions o members in the

international economic and nancial system.


14/2613

Other reorms also deserve consideration. For example, proposals have been made to

expand the use o double majority voting in the Fund. At present, a double majority

85 percent o voting power and a sixty percent majority o members is required to

amend the Articles o Agreement. Double majority voting (quotas and chairs) could

also be considered or the selection o the managing director and the chair o the

IMFC, as well as or key policy decisions and, perhaps, even to approve large-access

lending operations.19 These changes could help strengthen the weakening consensus

tradition in the Fund by requiring a majority o members to support those decisions thatdetermine the direction o the Fund. It could also help mute the undue power o some

o the major shareholders in the Fund. These and other changes in the way business

is conducted in the IMF would help correct the legitimacy decit in the Fund and help

regenerate a sense o ownership o the institution among the ull membership.

b. The Governance Structure within the Fund

The second dimension o the governance issues conronting the Fund involves the structure

o the institution and the workings o the various bodies charged with responsibility or

overseeing and or managing the institution. Here, the major issues concern the specic

responsibilities and, critically, the accountabilities o these dierent bodies. While this

dimension o governance o the Fund has received less attention than the voice and vote

issues, there does seem to be an increasing willingness to take it on.

The organizational structure o the Fund has some unique implications or the

governance o the institution. That structure is clearly deined in the Articles o

Agreement. Its main elements include the board o governors; the executive board;

management; and sta. The Interim Committee and its successor, the IMFC, were

added later. The Articles are also reasonably clear about the powers o the various

components o the structure:

The board o governors makes the major decisions on quotas, SDR

allocations, gold sales and the like, and bears overall responsibility or the

operation o the institution;

The IMFC was established as an advisory body, but, in reality, it is a powerunto itsel;

The executive board is charged in the Articles with ...conducting the businesso the Fund and takes most o the operational decisions;

Management runs the Fund on a day to day basis under what the Articles callthe direction o the executive board. Even on matters involving the

organization, appointment, and dismissal o sta, management is subject to

the general control o the executive board

The sta operates under the direction o management.

19 Mr. Strauss-Kahn, the new managing director, said in his statement to the executive board on September 20, 2007:I have given the example o a double majority voting system (quotas and chairs) as a way to better insure that keydecisions command the appropriate level o consensus. While I dont think any institutional change is mandatory,I can nevertheless make a commitment to consider that any decision not likely to obtain the support o a qualiedmajority o chairs should be delayed by the MD.


15/2614

Beyond theses general responsibilities, there is some lack o clarity about the

speciic roles o these various bodies. Some o that is dealt with in the By-Laws, but

gaps remain. More importantly, too ew well-deined mechanisms and processes

have been established to assure that all these players, especially the executive board

and the managing director, carry out their responsibilities in accord with the best

practices o organizational governance. By way o example:

The executive board, according to the Articles o agreement, selects the

managing director and can dismiss a managing director. But, to date, and in

substance, that has not been the case.

Similarly, while the Articles speciy that the managing director operates under

the general control o the executive board, in act, no one really assesses the

extent to which the board gives eective direction, or how the managing

director or management more generally, perorms under that direction.20

Some o these governance problems stem rom unresolved issues that originate

in the unique nature o the Fund and the way in which governance best practices

should be applied in such an institution. For example, the Board o Governors is

the closest analogy to a corporate body representing the owners. But it has some

crucial characteristics that distinguish it rom the traditional corporate board. For

one, while its composition changes governors come and go, the ownership they

represent changes only as new members join the Fund through what is essentially

a political process. There is no market or shares in the Fund. And perhaps most

importantly, no one rom the outside can capture a share o the ownership, appoint

like-minded people to the board o governors or the executive board, and orce

change and reorm on the institution as happens in the corporate world. There

can be no takeover or buyout by a Warren Buet or other outside investors or

stakeholders! This is as it should be in an inter-governmental institution like the

Fund. But it means that change has to come rom within what is essentially a static

membership and ownership, and it raises questions about how stakeholders other

than governments can bring about change and reorm.

Similarly, the role and nature o the executive board also challenges some o the

traditional concepts o governance. Boards in the private corporate sector and the

non-proit sector, and sometimes in the oicial sector, have rather circumscribed

decision-making authority. Boards typically select the CEO, decide compensation at

the most senior levels, determine major strategic issues, and the like. But running

the organization is let to the managers subject to general oversight by the board.

This tradition leaves the decisions o such boards at a rather high level; they are not

o an ongoing operational nature. A corporate boards role in operations is typically

very limited.

The responsibilities o the executive board o the IMF are very dierent and ar

more extensive. The board has many o the high level and strategic decision-making

20

As just one operational example, there is too oten a lack o clarity in the direction given to management and staon policy matters in the summings-up which conclude board discussions. This is oten the result o a ailure to ndconsensus in the executive board. But it makes assessing the perormance o management in carrying out that directionand holding management accountable nearly impossible. This is one o the causes o the lack o clarity regarding theFunds role in the low income countries where a ailure to nd consensus in the executive board is refected in a lacko clear direction in the summings-up o executive board discussions.


16/2615

powers o a corporate board. However, aside rom the speciic organizational and

personnel decisions that are let mostly to the managing director, the executive board

takes virtually all o the key decisions within the Fund. On surveillance, the board

completes the exercise with a decision expressing the Funds views about a countrys

policies;21 on lending, the board approves every program and the inancing oered

by the Fund in support o that program and reviews the countrys perormance

under the arrangement with the Fund almost continuously; it decides what inancial

instruments the Fund has at its disposal, its surveillance powers, and it recommendskey decisions on quotas, SDR allocations, gold sales, etc. to the board o governors.

Even in areas where the executive board does not take speciic operational decisions

or example, in the allocation o technical assistance, it periodically reviews and

assesses the decisions taken by management.

Thus, the Fund executive board is not simply an oversight body as are most corporate

boards; it is the main player in most o the speciic decisions taken in the Fund.

From a governance perspective, this reality makes the Fund boards oversight role

more complex as it is a direct actor in what it is supposed to oversee. At minimum,

this complicates the assigning o responsibility and accountability in the Fund two

key elements in any system o governance. Compounding this problem is the act

that there has been no ormal process or assessing the perormance o the executive

board. Some attempts are made at sel-assessment, through periodic reviews o

board procedures, board retreats, and other means. However, it is clear that these

are not suicient. At minimum, there should be a ormal process o sel-assessment

by the executive board a process seen elsewhere as a developmental tool or

improving the perormance o corporate and other boards. Consideration should

also be given to mandating an independent assessment o the boards perormance,

with the outcome reported to the IMFC or to the board o governors.

Another long-standing reality in the Fund is the ill-deined role and responsibility

o individual executive directors. Executive directors are oten described as wearing

two hats: one as the representative o a member country or group o countries that

appoint or elect him/her; and one as an oicial o the Fund. There can be conlicts

in these two roles. But while theses dual roles have never been well elaborated, they

can aect any eort to judge responsibility and accountability.22 Given the lack o

clarity on this issue, it may be preerable to cease reerring to executive directors as

oicials o the Fund and recognize that, substantively, and appropriately, they act

as representatives o the countries that appoint or elect them. Similarly, the calls or

executive directors to be independent including through longer than the current

two year terms and other changes seem inconsistent with the nature o the IMF as

an inter-governmental body. It would be preerable to recognize these realities and

consider changes that would result in more senior and more experienced individuals

21 Interestingly, while the executive board concludes the consultation process with individual members in the contexto surveillance, it is the sta that presents its views on the global situation in theWorld Economic Outlook and the GlobalFinancial Stability Report.22 What happens, or example when political considerations ormulated in capitals trump the judgment o an executivedirector. For example, what i an executive director comes to the conclusion that a policy program put orward by

a member country and recommended or approval and nancing by management, is inadequate to restore thecountrys economic and nancial viability? A directors duciary responsibility to the Fund would suggest a voteagainst approval o such a program and the nancing to support it so as to protect the Funds resources. But he orshe may be instructed by his or her authorities or political or other reasons to vote in avor o that loan. How doesthat aect judgments about responsibility and accountability, especially i the executive directors concerns turn outto have been correct?


17/2616

serving as executive directors. A non-permanent board that meets at the Funds

headquarters in Washington, DC only periodically to take major decisions (say

one week each month) might help bring about some o these, and other, welcome

changes.23 These issues warrant much more discussion and debate.

There is another complexity here separate rom the one embodied in the issue o

the two hats worn by an executive director. While judging the responsibility and

accountability o an executive director representing a single country may conrontthe issue raised above, that judgment is even more diicult in the case o a director

elected by a multi-country constituency. To whom, exactly, is he/she accountable?

Other than at the time o the next election, can anyone remove an executive director

representing a multitude o countries? This, too, has never been clariied.24

c. Governance rom Outside the Fund

The third dimension o Fund governance is what, or the want o a better name, can

be called governance rom the outside, i.e., the way in which entities beyond the

Funds own traditional governing bodies inluence the Fund and its policies and

decisions. This includes the roles played by the various agenda-setting bodies in

the global community, perhaps most importantly the G7/8, as well as the roles to

be played by civil society organizations, the private inancial community, and other

stakeholders

There are important evolutionary orces that aect the inluence that outside bodies

have on the policies and operations o the Fund. On the oicial side, there has been

the emergence, and ever-increasing visibility, o the various global bodies such as the

G7/8, the G20, the G24 and others. Witness the trend in the last iteen years or so o

a system in which the G7 deputies are in almost permanent contact with each other,

and oten with Fund management and sta, on policy and operational issues active

in the Fund. More recently, there has been the institution o preparatory meetings o

the deputies to the twenty-our ministerial members beore IMFC meetings. Prior to

that, Interim Committee meetings were prepared by the executive board. It may be

argued that there are positive and productive aspects o these evolutionary changes

in terms o better engaging senior oicials in capitals on Fund issues, resolving

dierences o view without involving the ministers, and the like. However, one

can also argue that this practice, along with a number o other developments, has

eroded the authority o the executive board and the role o executive directors.

A clear assessment needs to be made about the impact o these changes on the

governance o the Fund. The practice o having the executive board responsible or

23 Among other changes that would occur as a result o moving to a non-permanent board would be closer contacto executive directors with their capitals and ewer board meetings. The latter would permit the managing director tochair a higher percentage o all meetings. As one o the motivations or creating two additional deputy positions in1996 was to have additional people on the management team who could chair the board, this management structurecould also be re-considered (see below).24 In thinking about governance issues o the executive board, there is an additional matter that clouds the rules ogovernance within the Fund. That is the role o the managing director as chair o the executive board. He, too, has

several hats that can sometimes sit uneasily with each other as chair o the board; as CEO; as head o the sta; as thepublic ace o the Fund; etc. Is his position as chair o the executive board ully consistent with best practices o goodgovernance? Do the rather unique responsibilities o the executive board itsel validate the arrangement? Does theobvious need or a single individual to have responsibility or running the institution, especially when the executiveboard is a times tempted to take on that role, recommend continuance o the managing directors chairmanship o theboard? These issues, too, require urther discussion.


18/2617

the preparatory work or IMFC meetings would seem to be warranted. Intervention

rom capitals on critical issues can be managed through the executive directors,

as should be the case with most o the other business o the Fund. Increasing the

seniority o executive directors, and possibly making the board a non-permanent

body with executive directors spending most o their time in their capitals, could

acilitate resolution o this issue.

The emergence o the various agenda-setting groups has also aected the work othe sta and management o the Fund and raise questions about how sta interact

with these groups and with the executive board. Sta contact with these groups

probably began most intensively with the G-10 in the 1970s. There was a tradition

that sta returning rom meetings o the G-10 in which they had participated would

brie the executive board on those discussions. This practice seems to have allen by

the wayside even as the number, and perhaps the importance, o these groups has

increased and sta and management contact with representatives o such groups at

various levels deputies, deputy deputies, etc., has intensiied

The existence o these groups has also called into question the extent to which

the principles o good governance are adhered to in the oicial international

community. In the Brookings paper reerenced earlier, one o the principles o

global governance discussed was subsidiarity. This principle says that unctions

that subordinate organizations can perorm eectively belong more properly to

them than to a dominant central organization or group. This is in some ways an

issue o voice in that it suggests that speciic policies and decisions be let to those

most aected by them, but within a broad ramework established by the dominant

or global organization. Leaving issues to those likely to have the greatest expertise

would also generally support the principle o subsidiarity. This principle also helps

limit the agenda o the more global organization or authority, hopeully providing

greater eiciency.

The subsidiarity principle is important in the context o the IMF because pulling issues

unnecessarily out o the executive board o the Fund and up to the various agenda-

setting bodies such as the G7/8 has been, at times, both counterproductive and

potentially harmul to good governance practices. Recent examples include dealing

with the various debt relie initiatives, especially the Multilateral Debt Reduction

Initiative (MDRI), and the ormulation o various Fund inancing acilities such

as the Contingent Credit Lines and, earlier, the Compensatory and Contingency

Financing Facility neither o which proved operational as ormulated. 25 I the

agenda-setting body, the G8 in the case o MDRI and many other initiatives, had

restricted itsel to setting out some general principles and desirable objectives and let

it to the institutions to igure out how it should be done that is, i the subsidiarity

principle had been respected, better policies would likely have been ormulated and

a greater sense o ownership o these policies among the rest o the membership

would have resulted.

25 The story o the MDRI is a sorry one. The proposals adopted by the Finance ministers o the G8 in June 2005 and

endorsed by the Leaders at the Gleneagles Summit were ormulated not in the executive board o the Fund or the otheraected institutions, but by the G8 deputies, reportedly amidst serious dierences o view about what should be done.

What came out o their discussions and compromises was, in the view o many, unair to many low income countriesand was, in other ways, seriously fawed. In act, what was proposed or the Fund was inconsistent with the Articles o

Agreement and an unhappy construct had to be put together by the sta and accepted by the executive board to makeit workable, even i still not optimal.


19/2618

Dierent issues arise regarding the relationship between the Fund and the private

sector inancial community and civil society.26 This is an issue needing greater

attention as the role o such bodies under law, as well as in the context o accepted

concepts and practices o human rights, keeps evolving. Perhaps most important

in the current context is to urther increase the transparency o the Fund so that

individuals and groups in these communities, and others, can participate as inormed

partners o their governments in the issues being discussed and debated within the

Fund.27 One aspect o this concerns the transparency o the deliberations o theexecutive board. The High Level Panel on IMF Board Accountability convened by

the New Rules or Global Finance Coalition made a number o speciic suggestions

in this area. Greater transparency o the executive board would help increase

public understanding o Fund decisions and also provide a means to increase the

accountability o individual executive directors.

In short, governance o the Fund needs to be set in the context o these global

governance issues and the global governance structures that have emerged over

recent decades. One cannot pretend that the agenda-setting bodies, and the decisions

taken in those bodies, do not impact in a undamental way the manner in which the

Fund does its work and the extent to which those in the Fund executive directors,

management and sta, can be held responsible and accountable or the actions o

the Fund. One cannot also pretend that changing the voice and vote o member

countries within the Fund will, by itsel, resolve the issues o representation unless

the issues surrounding these global agenda-setting bodies are also addressed. These

are complex issues and they are obviously well beyond the capacity or authority o

Fund management or the Fund executive board to resolve. Nevertheless, the Fund is

impacted in undamental ways by the organization and work o the agenda-setting

bodies. A major international eort should be launched to review the way in which

these bodies are organized and how they relate to the governing bodies o the major

international organizations.28

d. Other Important Governance Issues

In addition to these undamental challenges to governance o the Fund that stem

rom the speciic nature and structure o the institution, rom the global institutional

setting within which it operates, and rom its management model (see below),

there have been very speciic events and actions that have aggravated the governance

problems in the Fund. These persistent problems have reduced the legitimacy and

eectiveness o the Fund, and have rustrated those who have been looking or better

governance and greater accountability in the institution. The speciics include:

The selection process or the managing director where, by all appearances,

the Europeans and the United States seem intent on holding onto the

26 See, or example, High Level Panel on IMF Board Accountability: Key Findings and Recommendations, New Rules or GlobalFinance Coalition (www.new-rules.org), April 10, 2007.27 There appears to have been a lapse in practice recently as the sta papers prepared or executive board discussions

on the revision o the 1977 Decisions on Surveillance and on quota issues have not been available outside the Fund,except when leaked.28 There is, o course, the major issue o the composition o the various groups and their legitimacy in talking amongthemselves and issuing guidance to the international community on a broad range o issues issues critical to countriesnot included in the groups. The most notorious recent example is, o course, the discussions in the G7/8 about theChinese exchange rate.


20/2619

anachronistic practice o determining by themselves who becomes the

managing director o the IMF and who becomes the President o the World

Bank. The events o recent months seem to suggest unwillingness on the part

o the Europeans and the US to reorm this process notwithstanding eorts

by the executive board itsel in July, 2007 to open the selection process to

candidates rom the entire membership.29 Now that a European has been

selected by the executive board, it is time to review again the selection process

and to evaluate the guidelines established by the board in July, 2007 againstthat experience. Clearly, changes are needed to create a genuinely open and

competitive process in which it is less likely that a small group o countries

with signiicant voting power can preempt the process as was done on this

occasion. The prospect o having to ace a double-majority vote to select the

managing director might help in this regard.

Similarly, the process through which the chair o the IMFC is selected needs

reorm. During much o the time that the Europeans have monopolized

the position o managing director, they have also held the chair o the

IMFC and its predecessor the IC. Even in the current round, a European

was nominated and ultimately selected as IMFC chair at the same time that

the Europeans were insisting on retaining their prerogative to name the

managing director.

Finally, just as the selection process or managing director demands reorm,the tradition o appointment o the irst deputy managing director by the

United States needs to be ended. In that position as well, a process open

to candidates rom all member countries needs to be instituted. I a multi-

deputy management structure is maintained, care needs to be taken to

assure a reasonable geographic dispersion o nationalities in these positions

over time. But, at the same time, the selection process needs to operate in a

way that helps assure that it delivers individuals with whom the managing

director can work eectively. The managing director should have a say in

that selection.

III. Managing the Fund

In recent years, there have been questions raised about the way in which the IMF

has been managed. Many o the issues were widely known and discussed both

within and outside the Fund, including in commentaries in the press. There have

been important issues regarding the leadership provided by management in seeking

consensus on key policy issues in the executive board and in clariying or sta

the operational implications o decisions on which consensus has not been ound.

Other issues have included the proper balance to be sought between travel by the

management team and time spent at headquarters and in chairing the executive

board. There have also been questions regarding the way in which sta was managed

and supervised, and questions about the conditions that had given rise to evident

29 The executive boards o the World Bank and IMF established in 2000 working groups to review the selectionprocesses or the Bank President and the Managing Director o the IMF. The working groups submitted their reportsto the executive boards in April 2001. The reports were endorsed by executive directors on the two boards and wereprovided to the IMFC which took note o them. The boards at that time were asked to consider urther steps toreorm the process. In this light, it is dicult to understand why the IMF board seemed caught by surprise in 2007 andhad to re-open the issue as i little or nothing had been done beore.


21/2620

problems aecting morale within the institution.30 These are the kind o issues that

should be discussed in the context o deciding the priorities or a managing director

and the deputy managing directors o the Fund priorities that should be set by

the executive board. Discussions on the six-monthly work program have not been

suicient to deal with these issues. Experience suggests the need or a robust process

o review by the executive board o the way in which a managing director is carrying

out the responsibilities o the oice.

As in any large organization and, to some extent, independent o the ormal structure

o management, the perceptions o individual managers o their responsibilities

and priorities, as well as the relations between managers, will aect the way in

which the organization is managed. This is inevitable. At the same time, it is the

responsibility o the executive board under the Articles to oversee the management

o the Fund and to give general direction to the managing director. Had there

been regular assessments o management by the executive board, a number o issues

that have arisen and that have aected both the substance o the Funds work and

the eiciency o its operations may have been uncovered and possibly dealt with as

they became evident.

But there may well be a structural problem here as well. For many years, the Fund

was managed by a managing director and a single deputy managing director. This

model became clearly untenable as the work, responsibilities, and array o activities

asked o the Fund by the membership expanded signiicantly in the 1980s. The

major change made to address this reality was the creation in 1994 o two additional

deputy positions providing or a total o three deputies, with one designated as

First Deputy Managing Director and intended to be clearly senior to the other

two. All three deputy managing directors have the authority to act as chair o the

executive board in place o the managing director. This structure seemed to suice

or some years. However, it may be argued that it was the conluence o highly

complimentary skills and personalities among the members o the management

team in those years that accounted or the success o this model. It remained an

open question as to whether the new structure was optimal or the institution

under dierent circumstances. The experience o the last several years, a period o

less activity than during the crises years o the late 1990s and early 2000s, raises

important questions about the suiciency o that management structure.

Under the current structure, each DMD has oversight responsibility or some

country work, certain policy issues, and various administrative areas. The country

work is demanding, partly because o the travel and representation responsibilities

involved, partly because o the internal processes that demand review and sign-

o o virtually all country documents by a member o the management team, and

because o the time that must be dedicated to chairing the executive board. The

policy and administrative responsibilities are similarly daunting. The organization

o administrative unctions the budget, personnel / human resources, and the like

may be particularly problematic as they are spread across the DMDs. 31 Beyond

these issues, it can be argued that this multi-deputy structure, in addition to other

orces, has also had the eect o diminishing the role and stature o department

30 These problems were well-documented in the Sta survey conducted in 2003.31 Problems in this area were also highlighted in sta responses to the survey conducted in 2003.


22/2621

directors. This results rom management sometimes keeping issues and decisions

within the team to the exclusion o others that should be involved; holding review

and sign-o authority on both country and policy papers the modus operandi

o the Fund to itsel; and dominating the Funds representation in many ora in

the international system. This plethora o time-consuming and travel-demanding

responsibilities has also robbed management o the time to be suiciently visible

within the institution and to provide clear guidance to sta on the issues conronting

the work o the Fund.

Various changes have been made to help deal with some o these problems. Oices

have been established to help organize some o the administrative responsibilities

o management; the deputy directors have each been provided a special assistant to

help manage their oices, and, more recently, some sign-o authority has reportedly

been delegated to department directors. However, some o these changes have

themselves had unintended consequences, including a possible urther reduction in

the stature and authority o department directors.

Unortunately, evident weaknesses continue to exist and no comprehensive review

o the management structure has been conducted, nor has serious consideration

been given to alternative structures. Suggestions that outside experts be brought in

to review the management structure are usually dismissed on the grounds that the

Fund is a unique institution and that expertise rom outside will not be attuned to

its special needs. There may be some truth to that. But it is also likely that outside

management expertise would be a useul resource to tap to solicit an assessment

o the current system and to begin to develop a set o alternatives that could be

subjected to debate and discussion internally. That should be a priority or the new

managing director. I management does not take the lead, the executive board,

under its oversight responsibilities, should itsel commission a review o the Funds

management structure.

Managements leadership o sta also needs to be an element o the executive boards

review o managements perormance. There are some long-standing issues, noted

earlier in this paper, that should be addressed:

Has the mix o sta been properly adjusted to the realities o the modern,

complex global inancial system?

Has the organization o sta been suiciently re-oriented to most eectively

bring together the extensive experience that exists within the institution

when analyzing and assessing the policies and developments in individual

countries and providing advice to members especially at times o crises?

Are sta suiciently trained in the practical aspects o economic and inancial

policy ormulation and implementation?

Has the silo nature o the departmental structure cited in so many reviews

o various aspects o the Funds operations been dealt with suiciently in therecent reorganizations?

Have the concerns voiced by sta about management most orceully in the


23/2622

extensive sta survey conducted in 2003 been taken seriously, ollowed up,

and eectively addressed?

Work is reportedly underway on a number o these issues, but by all appearances

much remains to be done.

IV. The Funds Income Model

The mechanism through which the Fund generates income to cover its administrative

expenses currently nearly $1 billion annually is ill-suited to the nature o the Fund

and the cyclical character o its lending operations. The Fund generates most o its

revenue essentially by setting a margin between the rate charged to borrowing members

or the use o the Funds nancial resources and the cost (or rate o remuneration)

paid to secure those resources rom creditor member countries. 32 Operating on

a spread makes sense or a nancial institution that runs, on an ongoing basis, a

balance sheet comprised o income-earning assets and cost-incurring liabilities such

as deposits and debt issues. The IMF is not such an institution. In the best o all times,

when global or regional crises are absent and ew members are availing themselves o

its nancial resources, the balance sheet shrinks and the institution has ew income-

earning assets and ew liabilities. Thats ne or the balance sheet, but it wreaks havoc

on the Funds income stream. Thus, i the Fund serves the community well through

its surveillance, technical assistance and other non-lending operations, thereby

contributing to stability and growth in the global system and in individual countries,

it is also, under the current income model, denying itsel the resources to cover the

cost o those activities. This is a contradiction overdue or correction.

In 2006, a group o eminent persons was asked to consider alternatives to the

current model. The group submitted its report and made speciic recommendations

in January 2007.33 The recommendations included:

Broadening the Funds investment mandate, i.e., allowing a broader range o

investments or its reserves to produce additional income on these accounts;

Investing part o the quota resources subscribed by members under a similarly

broadened (and higher yielding) investment authority;

Selling a limited amount o the Funds large gold holdings (currently 3,217

metric tons) and investing the proits rom such sales in suitable instruments.

The group advised that such sales be limited and strictly ring-enced to exclude

urther sales, and that such sales be conducted in such a way as to limit the

impact on the gold market;

Possibly charging member countries or services provided by the Fund,

including technical assistance.

32

In, practice, there are many complications in the system, including the impact o members reserve positions in theFund, burden-sharing mechanisms associated with the arrears o a ew members to the Fund, earnings on the reservesheld by the Fund, and others. But, in essence, the Fund operates rom the revenue generated by the spread on itslending operations with member countries.33 Report by the Committee to Study Sustainable Long Term Financing o the IMF, (the Crockett Report),January 31, 2007.


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The group estimated that the proposals to increase the Funds investment capacity wouldgenerate, in total, about $540 million annually.34 The IMFC, in welcoming the groups reportas a basis or discussion in the executive board, emphasized that dealing with the budgetaryissues conronting the Fund also required action on expenditures.

This is an extremely important issue. But care is needed to assure the proper outcome. Thebudgetary constraint the Fund aces should not be allowed to dictate the role and direction o

the institution. It may well be that budgetary savings, perhaps substantial, can be ound. Butthese issues should be treated in the correct sequence. The international community shouldrst decide what it wants rom the Fund; then the stang and organizational requirements and budgetary needs - to deliver on those responsibilities should be determined. Onlythen should the means be ound, including possibly those suggested by the eminent personsgroup, to secure the resources needed to operate the institution.35

V. CONCLUSION

There is a need or a comprehensive vision o the role to be played by the IMF in the emerging

global economic and nancial system. The elements o needed reorm are so tightly inter-linked that a piecemeal approach that deals with each element separately will not producea coherent strategy. For example, the quota discussion needs to be better inormed byagreement on the potential nancing role o the Fund and the resources and instrumentsthe Fund will need to ulll that role. The governance issues conronting the Fund needto deal not only with the voting power o members, determined essentially by basic votesand quotas, but also with all the other actors that determine the eective representation omember countries in the institution. These include the size and composition o the executiveboard, the quality and seniority o executive directors appointed or elected to representmember countries, the way in which the various global agenda setting bodies, especially

the G-8, deal with the broader representation in the Fund, and the way in which decisionsare taken in the institution (e.g., the issues o special majorities or double majorities). Theseand other issues including the processes or selecting the managing director and deputymanaging directors, as well as the important governance practices to hold management andthe board accountable or the way in which the institution perorms, will all aect the extentto which the Fund is accepted as legitimate by the membership and by other stakeholders.Obviously, issues o appropriate stang levels and the organization o sta will have to beinormed by decisions taken regarding the role the Fund is expected to play in surveillance, innancing, in assisting the low income countries, and in its role as a center o macroeconomicand nancial policy experience and expertise, including as a provider o technical assistance.

These considerations, in turn, will determine the stang and budgetary requirements o the

institution and will serve as input to any discussion o the Funds income model.

This will be a complex task to pull all these elements together into a coherent vision or theinstitution. It will be even more dicult to secure broad agreement among the membershipon such a vision. Right now, such broad agreement does not exist and the absence oagreement is weakening the institution and hindering its eectiveness. The world needs aneective IMF and that eectiveness will be secured only with a major eort to bring about the

kind o reorms outlined in this paper.

34

The Funds current administrative budget is just over $900 million.35 Unortunately, this does not appear to be the process underway. Reportedly, eorts are being made within the G7 tostrike a grand bargain whereby management o the Fund would accept a specic (and signicant) cut in sta positionsin return or support on some o its reorm proposals. Perhaps this would orce resolution o some o the questionsabout the appropriate role or the Fund and the associated stang needs, but it seems a distinctly second-best way in

which to deal with these important issues.


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Selected Publications:Money Supply, Money Demand and Macroeconomic Models, Boorman & Havrilesky, AHM Publishing Co., ArlingtonHeights, Illinois

Monetary Macroeconomics, Boorman & Havrilesky, AHM Publishing Co.

Structural Adjustment in Arica, Future Approaches and Lessons Learned rom the PastA View From the IMF inPolicies or Arican Development, I.G. Patel, Editor

Managing Financial Crises: the Experience in East Asia, J.Boorman, T.Lane, M.Schulze-Ghattas, A.Bul, A.R. Ghosh,J. Hamann, A.Mourmouras, and S. Phillips, Carnegie Mellon University, Carnegie-Rochester Conerence Series onPublic Policy 53 (2000) I-67, North-Holland

Modern Capital Markets:How to Make Them Work Better, New Economy and Asia: Proceeding o International Think Tank Forum 2001, Editorin Chie: Li Luoli, Scientifc and Cultural Publishing Co. Hong Kong.

Sovereign Debt Restructuring:Where Stands the Debate, CATO Institute, New York, October 17, 2002. Dealing Justly With Debt, Carnegie Councilon Ethics and International Aairs, New York, April 30, 2003.

Some Challenges Conronting the IMF, Institute o International Finance Seminar, London, November, 2004

Other Current Activities:Member o the Board o Advisors, Capital Markets Research Center, Georgetown University, Washington, D.C.Member o the Board o Trustees, Le Moyne College, Syracuse, New York (and chair o the Investment Committee)

JAck BoormAn

Former Counselor and

Director of Policy Development

and Review Department, IMF

Washington, D.C.

USA

Education:1963 B.S. Mathematics, LeMoyne College, Syracuse, New York1967 Ph.D. Economics, University o Southern Caliornia

Experience:1967-71 Assistant Proessor, University o Maryland

1971-74 Financial Economist, Federal Deposit Insurance Corporation

International Monetary Fund, 1974 June 2006

December 2001 Counsellor and Special Advisor to the Managing DirectorJanuary 2003June 2006 Special Advisor to IMF Management

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