Not a moment too soon
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Emerging Markets

Not a moment too soon

As shareholders weigh up the IMF’s future, its managing director Rodrigo de Rato tells Emerging Markets why he thinks his plans for a revamp are long overdue

The IMF’s budget is in decline and so too the morale of its staff. Some of the Fund’s best customers are now doing without it, leaving some of its biggest shareholders wondering what to do with it. In response to all this, earlier this year Fund managing director Rodrigo de Rato unveiled an ambitious plan to overhaul the institution, its mandate and its own funding.

In an interview with Emerging Markets, the former Spanish finance minister staunchly defended his proposals for a revamp – especially the contribution he thinks the IMF can make in helping to prevent massive surpluses and deficits from precipitating a currency crisis. But de Rato also addressed the equally pressing existential concern of reviewing the Fund’s budget.

The IMF makes money only when it lends to countries in crisis. The lack of recent crises means that the organization faces a 30% drop in its income over the next two years. As one official put it, the Fund effectively has “no revenues” at present, with so many previous borrowers having paid off their obligations.


Income model

De Rato does not believe that this situation will necessarily persist for long, given the uncertain global environment. “I believe that the income model of the Fund should not only look into lending activities,” he told Emerging Markets.


“The public goods the Fund provides are very varied, many of them relating to surveillance, but many of them related to capacity building. I think we should look at some model of the Fund that could be not only related to lending activities,” he says.


Many financial experts believe that the Fund’s future lies in helping to sort out big global imbalances. De Rato has made the task his mission. “A procedure to manage global imbalances needs to be agreed, and the IMF is the logical place to do that because it is a global institution and not just a group of countries,” he says. “At the end of the day, governments and parliaments are the ones that decide, but this is an important opportunity to address the issue collectively, and try to avoid mistakes that would not be beneficial to the world economy.”


Because “global imbalances affect, or are related to, global savings and investment and demand, no one should expect quick changes, and in fact probably no one should desire quick changes,” de Rato cautioned. “The only thing that can change things very quickly in that respect would be a crisis, and that is exactly what we do not wish to have.”

The IMF has already taken steps to deal with the imbalances. It has launched a Multilateral Consultation involving not only advanced economies such as the US, Japan and Europe that are normally charged with dealing with global issues, but also China and Saudi Arabia, two of the leading surplus nations.


Although de Rato emphasized that global financial imbalances cannot be unwound overnight, the sense of urgency over the need to deal with them is mounting. The Bank of England has presented an extreme scenario, where unwinding of imbalances could lower the dollar by as much as 30%, triggering a period of slow US growth. The Bank for International Settlements (BIS) has also warned that imbalances worsened in 2005 and are set to widen further.


De Rato described the IMF’s new Multilateral Consultations as a “vehicle for analysis and consensus building that helps our members to overcome some of the hurdles to action by emphasizing the benefits of joint action”.


No leverage

Some experts take a more circumspect view. “On the question of exchange rate management and the IMF, the whole push is largely a perceptual issue. What this is really all about is China – some people want the IMF to put more pressure on China to revalue its exchange rate,” says Harvard economics professor Richard Cooper. “They have the authority but they have no leverage. I can’t imagine a world in which the IMF dictates to the big countries.”


The IMF’s former chief economist Ken Rogoff believes the new emphasis is justified. “Issues involving global exchange rate systems are at the heart of the IMF’s charter. They have the expertise and the mechanisms to deal with imbalances,” he says. “The fact that they don’t have the leverage doesn’t matter – the G7, for example, increasingly doesn’t represent the world.”


De Rato’s push is part of a wider strategy for improving economic surveillance that forms part of the IMF Medium-Term Strategy, which ministers and central bank governors are expected to endorse at the Fund’s annual meeting in Singapore.

This strategy covers all aspects of the Fund’s activities, de Rato says. “It proposes changes in the way we conduct surveillance of individual members’ economies and of the global economy; changes in our approach to preventing and dealing with crises in emerging market economies; a refocusing of our activities in low-income countries; and changes in the Fund’s own governance to improve voice and representation.”


All this is happening at a time when demands for IMF services – by way of country programmes – have, by de Rato’s own admission, hit their lowest level in a quarter of a century. “It is true that the actual level of programmes right now is the lowest in the last 25 years, but it is also true that it was the highest only three years ago, so I don’t think we should rush to any conclusions,” he commented to Emerging Markets.


“In a world of globalized financial markets and in which emerging economies are more and more benefiting from private financial markets, any future crisis will probably be different from actual ones in the past,” he says. “We believe that emerging economies, even with strong macroeconomic fundamentals, in many cases still have vulnerabilities that can become very real in any sudden turn of market appraisal of risk.


“We have lived through a very substantial change in the appraisal of risk, in the low direction, but things can change very quickly. We should be vigilant that changes in financial markets do not occur in such a way that the present situation is reversed. The best crisis prevention is good macroeconomic policy. Building up reserves is one strategy, but there is a cost. There are pooling arrangements and different layers of protection, but if you face a substantial crisis, you might need international reaction, and that means the IMF.”


Asian financial integration

The Singapore meeting is being held almost 10 years after the IMF’s 1997 annual meeting in Hong Kong, which took place against the backdrop of a crisis that engulfed large parts of the region. This provoked strong criticism from some Asian countries of IMF policy conditionality, and brought calls from Japan for an Asian monetary fund. That never happened, but Asia has since taken various initiatives to strengthen its own defences.


De Rato conceded that such regional arrangements have their value. “We view them with a lot of support and encouragement,” he told Emerging Markets. “We believe Asia will benefit from financial integration. It will make the Asian economies more relevant in world markets, and will give Asian economies better instruments to use their own financial resources and savings,” he says.


Meanwhile, in Singapore, the IMF will be seeking to strengthen its own relevance by considering new types of instruments for preventing or dealing with crises. “We have to sit down with member countries – possible lenders and possible debtors – and discuss to what extent the actual configuration of our instruments is sufficient, and to what extent emerging economies that have strong fundamentals require [new] instruments,” he said in a press conference.


De Rato acknowledged that the Contingent Credit Line that the IMF experimented with, as an instrument for making special credit lines available to countries facing potential problems, had failed. “The CCL never had any takers because it had a

problem of stigma,” he says. “Countries understood that adopting the CCL was like sending a message to the market that they expected a crisis. So we have to avoid that. We need an instrument that will send the right signal in terms of automatic response.

This is a debate that we have already started, but I don’t think it will end quickly …”


Quotas

Another key item for the Singapore meeting is that of IMF quotas (which determine voting rights and access to facilities within the Fund). “An important element of the medium-term strategy is ensuring that the representation of members in the Fund is fair, and that all members have an adequate voice,” says de Rato. “I envisage that we tackle the issue in a two-year programme of action, beginning with some key decisions in Singapore.”


The IMF executive board decided at a meeting on August 31 to grant an immediate ad hoc quota increase to China, South Korea, Mexico and Turkey – four countries whose voting power at the IMF has lagged especially behind their economic size. Their combined share will be raised by 1.8% of the total quotas in issue. The Board resolution also committed the IMF to a second stage of changes which are expected to increase those countries’ votes further, along with a few other underepresented countries, while decreasing the votes of countries such as Belgium.

“I would also want our members to agree in Singapore to move during the next two years on more fundamental changes.”

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