Lars Heikensten: The IMF - mandate, means and governance in a changing world
Speech by Mr Lars Heikensten, Governor of the Sveriges Riksbank, at the Joint IMF-Bundesbank
Symposium "The IMF in a changing world", Frankfurt, 8 June 2005.
* * *
The question posed to this panel is "The IMF - a panacea for every illness?". That it is being asked at
all indicates that confidence in the IMF is strong today. I agree with those that have great confidence in
the IMF. Nevertheless, my answer to the question is no: The IMF is not - and should not be - a
panacea for every illness. Allow me to raise a number of issues against this background.
Focus on the core functions
The IMF has a unique mandate - to promote global macroeconomic and financial stability. This is the
fundamental basis of sound economic performance. The IMF's mission is certainly not less significant
today than it was before.
It was no coincidence that when the IMF was founded, in Bretton Woods in 1944, it was accompanied
by the creation of the World Bank and (later) the WTO - with explicit areas of responsibility. It is
important to adhere to these in order for each of the organisations to be able to work effectively and
efficiently. A stable economic development is the basis of other international organisations' work. So it
is vital that the IMF continues to focus on its core functions - and to do it well.
The IMF's objective and instruments
The IMF's mandate is still valid in the main - in spite of the enormous changes that have taken place
in the international financial system since the IMF was created. We still need an organisation with the
task to foster trade, employment and growth by promoting international monetary cooperation as well
as macroeconomic and financial stability.
On the other hand, there is always reason to consider whether the Fund's instruments to reach this
overall objective should be modified. The IMF's main instruments today are surveillance, lending and
technical assistance. Allow me to say something about each of these.
Surveillance
The IMF's key instrument for reaching its overall objective should be its preventive activities, which are
primarily carried out within the scope of its surveillance function. The IMF's primarily role is not to treat
illnesses but to prevent them from breaking out.
Much can be done to bolster the IMF's surveillance function, both as regards individual countries but
also, to an increasing extent, by way of a stronger regional and global focus. This change in emphasis
can, among other things, be motivated by the fact that globalisation and increased integration has
resulted in a situation where more and more countries' national policies give rise to externalities. A
strong 'multilateral' surveillance function could contribute, more clearly than today, to creating a broad
international discussion of global imbalances, incorrectly valued exchange rates, etc., which generate
risks to stability both in individual countries and in the international financial system as a whole.
In this context, it is crucial that the member countries accept and support the role that has been given
to the IMF, including taking seriously its advice and recommendations. We are often more keen to
underline the importance of the IMF's surveillance function for other countries than we are to be
guided by the IMF's analyses of our own countries. This is not beneficial for the IMF's credibility.
Lending
Even though the Fund's surveillance is effective it is likely that there will sometimes be a need for IMF
financing in the future as well. This holds for poor countries with very limited or no access to private
capital markets, but also for emerging market economies that have access to private capital markets.
In this respect, it is important to differentiate between IMF lending to address 'traditional' current
account crises and capital account crises, although this distinction is sometimes hard to do in practice.
In the event of a traditional current account crisis, many countries today can obtain loans in private
capital markets. This is a result of the increasing liberalisation of the international capital market over
several decades. The IMF's role in situations such as this has thus become less important, although
probably not done away with entirely. Catalytic financing from the IMF, which is provided in connection
with economic policy programs designed to address the underlying account problems, may still be
important for resolving crises. The situation is worse when it comes to capital account crises. These
often stem from sensitivity to fast swings in capital flows, and break out when economic policy lacks
credibility. They can also be caused by a combination of domestic problems and contagion from other
countries that are considered to be in similar economic situations. At the same time as the free
movement of capital increases the potential welfare effects of globalisation, it entails risks that can
only be managed through disciplined economic policy. IMF financing for capital account crises should
principally aim to quickly restore confidence in the affected countries' economic policies. The intention
should be that the loans be paid back to the IMF after a relatively short period of time.
When a serious crisis is at hand, it is hard to say no to a loan request. At the same time, it is important
to counter tendencies towards moral hazard, which in the longer term could result in both riskier
economic policies and irresponsible lending from private creditors.
This is a genuinely difficult issue. There are no easy solutions. The Nordic-Baltic constituency has
argued that the use of the IMF's loan instrument must be based on unambiguous, predictable rules.
And that the rules be applied. This has not always been the case, e.g. as regards certain decisions
concerning exceptional access, i.e. where the IMF has granted substantial loans without requiring
sufficient conditionality. In a number of instances the result has been a longer-term dependence on
loans and in several cases recurrent crises as well.
We should now, when the economic and financial situation in the world is relatively calm, take the
opportunity to simplify and clarify the rules further, particularly as regards their application. When the
next financial crisis occurs it may be too late.
Another aspect of the Fund's function in crisis management is its role when countries are forced to
suspend payments. It is possible to further strengthen the instruments available today - Collective
Action Clauses as well as Principles for Stable Capital Flows and Fair Debt Restructuring - in order to
ensure a transparent and predictable debt restructuring process for borrowers and lenders.
These instruments lay the main responsibility for agreeing on debt renegotiation terms on the borrower
countries and creditors. The Fund's most important function in such circumstances is to provide the
parties with the best possible information about the economic situation so as to facilitate agreement.
The Fund should also try to contribute to ensuring that economic policies in the debtor country make it
possible in the longer run to restore balance and to reduce the country's debt to a level that is
sustainable in the long term. The Fund itself may have to provide some financing to achieve this, but
when it comes to countries in highly vulnerable positions Fund financing can only play a limited role.
It will not always be possible to bring about a sustainable debt level in this way without drawn-out
negotiations and considerable economic costs. To make these kind of situations more predictable, and
also more easy to resolve, it would be desirable to strengthen the existing framework with a final
objective to have comprehensive framework for the restructuring of sovereign debt.
Technical assistance
The IMF has unique competence through its ability to combine scientific knowledge and institutional
skills with longstanding experience of work in individual countries. This competence often applies to
'narrow' areas that a particular country (normally) only seldom requires help with. This includes advice
and support regarding how to build up a functioning supervisory authority or how to manage a banking
crisis. It is crucial to make the utmost use of this competence.
The IMF has untapped potential
What I have said so far, that the Fund's mandate and main instruments for achieving it are essentially
appropriate, is hardly controversial. Most people agree on this in theory. In practice, however, it is
more difficult. When it comes to the crunch, we member countries do not always allow the IMF to
effectively carry out the functions that we have given it a mandate to perform.
In my opinion, the IMF could play a more important role than it does today. But that is not principally
due to its mandate and instruments as such but because we as members do not allow it to fulfil its
potential.
Wherein lies the untapped potential? In which of the IMF's main fields could the organisation play an
even stronger part?
The problems are not a consequence of shortcomings in the borrowing instruments. I do not see any
immediate need for new types of lending instruments, such as non-borrowing programs or a
reintroduction of Contingency Credit Lines. There are already surveillance methods in place to deal
with such situations, and today's borrowing instruments are sufficiently flexible to meet the existing
requirements (and demand).
Nor do I believe that the problems to any great extent are due to incorrect analysis or erroneous
assessments, even though the situations faced by the Fund are often difficult and the advice given has
been open to question from time to time. Nonetheless, there are a number of things that can be done
in this area.
Shortcomings still exist, as I mentioned earlier, as regards the Fund's participation in crisis resolution.
There is scope for further development of those instruments that exist today. The reason why this has
not happened is because some countries oppose it for political reasons. This brings me into the role
that "political considerations" play for the IMF to work well.
In my view, the central problems of the IMF are often political in nature. These problems exist at
several different levels:
•
Individual countries are sometimes for political reasons not willing to take the sometimes
bitter medicine prescribed by the IMF's staff and Executive Board and engage in serious
dialogue. Neither is it unusual, if they do swallow the medicine, that the countries blame any
side-effects on the IMF whether they were a result of the medicine or not; that the ownership
- to use IMF vocabulary - is weak. At the same time, there may also be scope for the IMF
itself to become better at operating in an environment where strong political considerations
are present.
•
Nor are groups of countries always willing at IMF meetings to raise questions of crucial
importance to the world economy as a whole. Larger countries do not want to run the risk of
coming under the spotlight. As a result, the big industrial countries normally prefer to discuss
imbalances and exchange rates in a narrower circle, if at all.
•
Also when dealing with financial crises, political considerations are constantly present.
Everyone that follows IMF's work in this area the last 10-15 years, has been able to see that
geopolitical considerations sometimes play an important role when defining the conditionality
- with mixed results.
What can be done to strengthen the IMF?
There is every reason to approach this question with humility. Many people have reflected on it and
plenty of suggestions have been put forward in the debate. Since the crucial problems are political,
they are also likely to require political solutions.
In recent years, the discussion has focused on matters to do with quota, voice and representation
(QVR). Many countries consider themselves to be underrepresented under the current structure.
Almost without exception, countries favour criteria for representation that boost their own influence.
This is normal when these kind of issues are discussed, but makes progress difficult. In the eyes of
many it is Europe that is overrepresented. But it is enough to read the book 'An Uncertain World', by
the former US Secretary of the Treasury Robert Rubin, to realise that it is not Europe that has the real
power - it is the United States that essentially calls the shots. This simple example illustrates that there
is a big difference between the formal and actual power.
Personally, I come to a number of different conclusions from this discussion. The world has changed
since the fall of communism and as a consequence of the positive development in a large number of
emerging markets. That gives cause to modify countries' formal influence in the IMF by updating
quotas to better reflect recent changes in world economy. Such changes should be implemented step
by step, and with as broad support as possible.
Some argues that the criteria used for determining countries' influence should be modified. I am not
convinced that this is the right way to move forward. There is much symbolism in this issue, which
makes it a difficult one. For obvious reasons, it is also difficult to find criteria that balances the need for
both borrowing countries and creditors to get reasonable influence, and, at the same time assures that
the organisation functions well. The world is changing quickly and it is only a couple of years since
several of the big emerging markets, which now according to a GDP criterion should be given greater
influence, were in need of support from the very countries that today by the same criterion would have
to scale back their role. We do not know what the situation will be in five or ten years. Maybe, there
are reasons to aim for more regional representation? A very difficult question - which I do not think
can be ignored - is if the level of "democracy" or "governance" in individual countries' should be a
factor when determining countries influence in the IMF. Whatever the answer to this question is, it will
have potential consequences for the legitimacy of the organisation.
Finally, we should not be led to believe that a changed representation per se, resolves the problems of
the IMF. There are a number of other things that could, and should, be done that may even play a
more important role.
Allow me to indicate a number of areas where more could be done, and where the prospect of
progress is probably higher than in the QVR-field. I myself have positive experiences of a similar
gradual process of reform within the framework of the Bank for International Settlements (BIS).
1. Much has been done to increase transparency in various ways at the IMF. Greater openness
is probably the most important way to develop the organisation's analysis and surveillance
activities. In a longer perspective, openness can also be vital to create a political pressure for
change in individual countries. In the same way, openness with regard to current imbalances
lends support to change in different countries and for considerations in the financial markets.
I myself would very much like to see more transparent application and assignment
procedures for posts at all levels within the IMF. The best candidate should get the job
regardless of the applicant's country of origin.
2. For the IMF to have enough weight, it is necessary that the key issues for the world economy
really are discussed at the IMF's table and not at others. Those who wishes to strengthen
the IMF - and are serious about it - could therefore not create new forums outside the IMF
with a view to discussing matters that fall within the IMF's mandate. If this is done, the
organisation will, in practice, be undermined.
3. One way of reducing the need for creating new fora, and, at the same time, in a pragmatic
way approach issues of representation, would be to work more actively in the Executive
Board with various (small) committees/subcommittees (similar to those in many national
parliaments and in the Executive Board at the World Bank). For example, there could be a
committee for global exchange rate issues, in which the large currency blocs are
represented; another committee focused on poverty issues, where poor countries and major
donor countries have a high representation; and a committee for crisis resolution, in which
creditors have a strong position, etc. Reforms in this direction could also increase the
efficiency of the Executive Board. It could also imply that a small increase in the number of
chairs would be manageable. The problem that a number of countries would end up outside
some of the discussions, should not be exaggerated particularly if the consequence of total
changes is that IMF gets a more central role in the international discussion than today. To
the extent that the problem remain, it should be possible to manage through a high degree of
openness.
4. The role of the Executive Board should be stronger and more clearly defined in relation to
the IMF's management. The current principle whereby the IMF's managing director is both
chairman of the Board and responsible for executing the Board's decisions is open to
question. With a more clear division of responsibilities, the IMF management could be more
effective and, in practice, possibly stronger. It is also vital that the Board is represented at a
high enough level with full confidence from the capital level in order for the Board to be able
to become an effective arena for central policy discussions.
5. The IMFC could be reinforced. The IMFC Deputies group could also be strengthened by
convening also in between the annual and the spring meetings. It is important that all
countries participate at a high level (today, many countries participate with their Executive
Directors). One likely reason that the BIS functions more smoothly, a part from the fact the
issues discussed are of a less political nature, is that those who take the decisions on the
domestic front are the same people that meet in Basel.
6. Overhaul the IMF's internal organisation. As multilateral surveillance becomes more
important, the country departments should work (even) closer with the departments that
possess knowledge of institutions and institution building. It is also reasonable that the IMF's
current resource base, which primarily consists of economists, be broadened with people
that have a financial background and practical experience of policy work and institution
building in their own countries.
Concluding remarks
To sum up:
•
The IMF's overall objective is still valid;
•
The IMF's instruments for reaching this objective - surveillance, lending and technical
assistance - are, in general, functional and effective, in theory;
•
In practice, however, many of the IMF's member countries do not allow the Fund to play the
role that it could have. The IMF has untapped potential, not least in the area of surveillance;
•
The untapped potential is closely related to political issues. Many countries do not seriously
consider the recommendations given to them by the IMF and/or blame the Fund for its own
problems. Other countries want to avoid that the consequences of their own policy actions,
for the rest of the world, are discussed within the IMF or prefer to discuss them elsewhere.
•
To increase the legitimacy of the IMF, there are reasons to consider the formal governance
issues, (i.e. the QVR-issues). A consensus has to be built, step by step, on how to deal with
this. However, to increase the efficiency of the Fund, a number of other reforms could be
implemented that are as important as the QVR-issue. In these areas it is possible start
moving forward at once.
Thank you.