Strengthening the Governance of the International Monetary Fund: How a Dual Board Structure Could Raise the Effectiveness and Legitimacy of a Key Global Institution

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The ongoing financial crisis and a difficult international adjustment process involve a multitude of actors and forums. They all grapple with the complexities of a globalized economic and financial system and the challenges arising from the financial turmoil and economic downturn. Governments have responded with unilateral, bilateral, or regional actions. Major central banks have cooperated on an ad hoc basis, and the G7 and the G-20 have attempted to provide economic stewardship. But the considerable spillovers and policy interdependence in a globalized economy that were already visible in the run-up to the turmoil have shown that the international monetary and financial system needs an effective steering committee to address such spillovers and facilitate cooperation on global economic matters.

For decades, the International Monetary Fund (IMF) was at the helm of the international monetary system. However, an alleged unequal treatment of its members, an ever expanding mandate diluting its core responsibilities, complacency in its policy advice, and the dominance of its governance by some large countries have more and more sidelined the IMF in the international policy debate. While the actions by the G7 may have been sufficient to address economic shocks in the past, the emergence of new economic players in Latin America, Eastern Europe, and Asia necessitates a fresh look at how to address global economic challenges, which involve a rising number of systemically important players.

The IMF has realized that it risks being sidelined in global economic affairs and is now in its fourth year of a strategic review of its setup and activities, with the declared objective of regaining its position as the "steward of international financial cooperation and stability" and putting itself firmly at the center of the international monetary system. Progress is under way: The IMF is strengthening its surveillance by deepening the analysis of interlinkages, including exchange rates, in its bilateral economic surveillance. It is placing more focus on macrofinancial linkages. Moreover, it is reviewing its lending instruments to adapt to the requirements of Fund members, and it is also revising its leading role. As far as IMF resources are concerned, there is broad agreement among the membership that the Fund's lending capacity needs to be substantially increased. While discussions continue on the precise amounts and modalities, Japan and the EU have announced that they will provide loans to the Fund in the order of US$100 billion each; a response from the US is still outstanding.

Will these reform steps be sufficient to restore the IMF as the central institution for international monetary cooperation? This is to be doubted. The crucial element that is missing to complete the reforms is an overhaul in the governance of the IMF and, in particular, in the structure and functioning of the executive board to transform this body into an effective and legitimate forum for dealing with global economic issues. The only step undertaken in this context was to update the byzantine way of calculating quotas; that is, countries' shares in the Fund, in spring 2008. This topic had occupied IMF bodies for over two years and resulted in a shift of 2.7 percent of the votes from advanced to emerging and developing economies. The reform is a good illustration of the proverbial elephant giving birth to a mouse, because it abstracted from changes to the structure and functioning of the board that are much more relevant than small adjustments in voting rights of a body that rarely takes formal votes. (1) In principle, the IMF executive board is uniquely placed to provide authoritative guidance to IMF member countries, exert peer pressure, and give economic policy advice. Being in continuous session, it receives up-to-date information on developments in member countries as well as in the global economy. It has an overview of different policy frameworks and economic policy tools and is aware of the constraints of domestic policymaking, all of which can facilitate tailoring its advice to specific countries. …