Directions for Reform Directions for Reform of the International of the International Monetary FundMonetary Fund

Presentation by Timothy Lane (IMF)Presentation by Timothy Lane (IMF)Oliver Smithies LectureOliver Smithies LectureHosted by Balliol College in association with OxoniaHosted by Balliol College in association with Oxoniaand Department of Economicsand Department of Economics11 November, 200411 November, 2004

Two main sets of Two main sets of issues which are issues which are intertwined intertwined What does the IMF do?What does the IMF do? How is it governed?How is it governed?

The first lecture focused on first set The first lecture focused on first set of issues (the IMF’s role); the of issues (the IMF’s role); the second lecture will link these with second lecture will link these with the second set of issues related to the second set of issues related to the decision-making process. the decision-making process.

Some areas of tension Some areas of tension in existing rolein existing role ConditionalityConditionality Prolonged useProlonged use Emerging market crisesEmerging market crises Low-income countries Low-income countries

Some key tensionsSome key tensions

Parsimony versus Parsimony versus comprehensivenesscomprehensiveness

Selectivity versus pressures to lendSelectivity versus pressures to lend Bailins and bailouts—need for clear Bailins and bailouts—need for clear

principles versus pitfalls of principles versus pitfalls of predictability predictability

IMF financing as a signal IMF financing as a signal ““Ownership” Ownership”

Existing governance Existing governance structurestructure Member country quotas determine:Member country quotas determine:

– Share of financing providedShare of financing provided– Normal access to financingNormal access to financing– Voting rightsVoting rights

Board of GovernorsBoard of Governors– 85 percent majority required for major 85 percent majority required for major

(“constitutional”) changes—implies de facto US (“constitutional”) changes—implies de facto US veto veto

International Monetary and Financial International Monetary and Financial CommitteeCommittee

Executive Board—24 Directors, appointed or Executive Board—24 Directors, appointed or electedelected

Governance of day-to-Governance of day-to-day operationsday operations Executive BoardExecutive Board

– Approves IMF financing to particular countries (including Approves IMF financing to particular countries (including new arrangements, reviews, and waivers)new arrangements, reviews, and waivers)

– Makes policy assessments in surveillance context Makes policy assessments in surveillance context – Approves general policies Approves general policies – Approves budgetApproves budget

Management and StaffManagement and Staff– Management consists of Managing Director, 3 Deputies Management consists of Managing Director, 3 Deputies

and their officesand their offices– Staff work in area, functional, and support departments Staff work in area, functional, and support departments – Staff develops specific proposals which management Staff develops specific proposals which management

approves and are submitted to Board for decisionsapproves and are submitted to Board for decisions– Management responsible for internal resource allocation, Management responsible for internal resource allocation,

organization of work, etc. organization of work, etc.

How are decisions made How are decisions made in practice? Example: in practice? Example: financial arrangement for financial arrangement for MacedoniaMacedonia

– Pre-mission discussions, analysisPre-mission discussions, analysis– Briefing paper: preparation and review Briefing paper: preparation and review

(Intra- and interdepartmental review, (Intra- and interdepartmental review, management approval) management approval)

– Discussions with authoritiesDiscussions with authorities– Staff report: preparation and reviewStaff report: preparation and review– Board discussion and decisionBoard discussion and decision– Authorities implement policies, draw Authorities implement policies, draw

financing financing

Constraints on the Constraints on the processprocess Policies and procedures: e.g. access policy, conditionality Policies and procedures: e.g. access policy, conditionality

guidelines, facilities; designed to provide uniformity of guidelines, facilities; designed to provide uniformity of treatment, consistency in approachtreatment, consistency in approach

Review process Review process Need for agreement with country authorities and Board Need for agreement with country authorities and Board

approvalapproval Even once an arrangement is approved, it is a decision by Even once an arrangement is approved, it is a decision by

the IMF but not (formally) a commitment by the country the IMF but not (formally) a commitment by the country – The country can stop implementing the program and stop The country can stop implementing the program and stop

drawing the money (and this often happens)drawing the money (and this often happens)– And if the authorities do not fully implement the envisaged And if the authorities do not fully implement the envisaged

program, waivers and reviews provide a means to continue program, waivers and reviews provide a means to continue financingfinancing

Financing assurances:Financing assurances:– Official creditors and donorsOfficial creditors and donors– World BankWorld Bank– Private creditorsPrivate creditors

Features of processFeatures of process

Discretion (e.g. in designing program, setting Discretion (e.g. in designing program, setting conditionality, determining access) is constrained conditionality, determining access) is constrained by internal review and Board approvalby internal review and Board approval

Board decisions based on consensus—differences Board decisions based on consensus—differences reflected in language of concluding remarks; staff reflected in language of concluding remarks; staff work “in shadow of” the need for Board approvalwork “in shadow of” the need for Board approval

Key Board documents now presumed to be made Key Board documents now presumed to be made public, if authorities agree (and in an increasing public, if authorities agree (and in an increasing number of cases, they do) number of cases, they do)

Many cooks—difficult to identify who is Many cooks—difficult to identify who is responsible for a particular outcomeresponsible for a particular outcome

Collaboration with Collaboration with World Bank and other World Bank and other agencies agencies Financing assurancesFinancing assurances Overlapping areas of responsibility and spillovers from Overlapping areas of responsibility and spillovers from

one policy area to anotherone policy area to another Need for collaboration—recent steps to strengthen Need for collaboration—recent steps to strengthen

procedures (“lead agency” principle, upstream procedures (“lead agency” principle, upstream consultation)consultation)

Cross-conditionality:Cross-conditionality:– legally, each institution responsible for its own financing;legally, each institution responsible for its own financing;– but in practice, each institution’s financing decision but in practice, each institution’s financing decision

depends heavily on the other’s financing as well as the depends heavily on the other’s financing as well as the analysis underlying that financinganalysis underlying that financing

– this element of joint decision-making is particularly this element of joint decision-making is particularly important for IMF and World Bank in low-income country important for IMF and World Bank in low-income country (PRSP) context(PRSP) context

– but it’s also relevant with respect to other agencies but it’s also relevant with respect to other agencies (donors, etc.) in other contexts (donors, etc.) in other contexts

What is different in What is different in handling higher-profile handling higher-profile country cases and policy country cases and policy issues?issues? Time pressure often more intenseTime pressure often more intense More (and more senior) people involved More (and more senior) people involved

throughout throughout Informal briefings of Board Informal briefings of Board Sometimes staff meet with individual Executive Sometimes staff meet with individual Executive

Directors or groups, or with groups of officialsDirectors or groups, or with groups of officials More public scrutiny; Civil Society involvement More public scrutiny; Civil Society involvement

esp. over policy issuesesp. over policy issues Greater likelihood that other players are involved Greater likelihood that other players are involved

and need to be consultedand need to be consulted In some cases, influence via more indirect In some cases, influence via more indirect

channelschannels Political considerations may be more important Political considerations may be more important

Some issuesSome issues

Voice and representation for Voice and representation for developing countriesdeveloping countries

Disproportionate influence of Disproportionate influence of some large countries some large countries

How is governance exercised?How is governance exercised? Accountability for decisionsAccountability for decisions

Voice and Voice and representation of representation of developing countriesdeveloping countries Voting structureVoting structure

– Rationale for existing structureRationale for existing structure– Reasons for change: debtors disproportionately Reasons for change: debtors disproportionately

affected by IMF, esp. with more pervasive affected by IMF, esp. with more pervasive conditionality, standards and codes, etc. conditionality, standards and codes, etc.

– Increasingly sharp division into creditor and debtor Increasingly sharp division into creditor and debtor countriescountries

It’s not just the votes: developing countries’ It’s not just the votes: developing countries’ influence is also affected by: influence is also affected by: – Supporting resourcesSupporting resources– Multi-country constituencies Multi-country constituencies – Access to HQ staffAccess to HQ staff– Informal pact for selection of Managing DirectorInformal pact for selection of Managing Director

How to increase How to increase developing country developing country shareshare Apply existing formula: would Apply existing formula: would

increase voting power esp. of increase voting power esp. of emerging Asia (esp. China), emerging Asia (esp. China), reduce that of Europereduce that of Europe

Take account of population: Take account of population: China, India big beneficiariesChina, India big beneficiaries

Increase basic votes: would help Increase basic votes: would help small countries esp. in Africasmall countries esp. in Africa

Large-country Large-country influenceinfluence Facilitated by Facilitated by

– voting powervoting power– nature of decision-making process nature of decision-making process – role in supplementary financingrole in supplementary financing– locationlocation

Whether and how influence Whether and how influence exerted depends on issueexerted depends on issue

Alternative forms of Alternative forms of governancegovernance Two polar models: Two polar models:

– Direct control: all decisions made by member Direct control: all decisions made by member governments (or their representatives); staff governments (or their representatives); staff and management do nothing without and management do nothing without member countries’ approval and are thus member countries’ approval and are thus responsible only for executing the decisionsresponsible only for executing the decisions

– Accountability: member countries set clear Accountability: member countries set clear objectives, give staff and management power objectives, give staff and management power to achieve them, and hold them responsible to achieve them, and hold them responsible if not achievedif not achieved

Present governance structure involves a Present governance structure involves a mix of these elements—but is it the right mix of these elements—but is it the right mix?mix?

Arguments for move Arguments for move toward greater reliance toward greater reliance on accountabilityon accountability Adverse implications of political influence in cases of Adverse implications of political influence in cases of

– prolonged useprolonged use– bailouts, bailins in capital account crisesbailouts, bailins in capital account crises– proliferation of conditionality (either as flipside of lack of proliferation of conditionality (either as flipside of lack of

selectivity, or favoring specific interests)selectivity, or favoring specific interests) Dynamic inconsistency—need to build institutional Dynamic inconsistency—need to build institutional

reputationreputation Potential loss of focus, tendency toward proliferation Potential loss of focus, tendency toward proliferation

of objectives as politically-controlled Board is of objectives as politically-controlled Board is responsible for minute details of decision-making responsible for minute details of decision-making

Difficult to establish where the buck stopsDifficult to establish where the buck stops Limited voting power of developing countries is more Limited voting power of developing countries is more

of a problem when control is exerted directlyof a problem when control is exerted directly

How could direct How could direct political control be political control be reduced?reduced? Smaller Board, more elected Directors, fixed Smaller Board, more elected Directors, fixed

termsterms Further increases in transparencyFurther increases in transparency Would need to be accompanied by Would need to be accompanied by

– Establishing other forms of accountability—so that the Establishing other forms of accountability—so that the result would not be to establish a free-standing result would not be to establish a free-standing bureaucracybureaucracy

– Greater reliance on uniform rules and standardsGreater reliance on uniform rules and standards– Clearer delineation of field of operationsClearer delineation of field of operations

To have a chance of success, reforms would To have a chance of success, reforms would need to increase the institution’s effectiveness in need to increase the institution’s effectiveness in a way that most member countries would see as a way that most member countries would see as desirable desirable

AccountabilityAccountability

3 main elements needed:3 main elements needed:– Clear, limited objectives, achievable Clear, limited objectives, achievable

with powers allocatedwith powers allocated– independent information on whether independent information on whether

objectives have been achievedobjectives have been achieved– framework for action in response to framework for action in response to

this information this information

Possible indicators of Possible indicators of the results of IMF the results of IMF actionsactions

Macroeconomic outcomes (growth, inflation, poverty)Macroeconomic outcomes (growth, inflation, poverty)– But the IMF does not control theseBut the IMF does not control these– Incentive to shun countries that most need IMF supportIncentive to shun countries that most need IMF support

Deviation of outcomes from projectionsDeviation of outcomes from projections– Could be useful in disciplining projections (although it Could be useful in disciplining projections (although it

would push toward greater pessimism) would push toward greater pessimism) – Incentive not to intervene in risky situationsIncentive not to intervene in risky situations

Intermediate outputs (e.g. number of lending Intermediate outputs (e.g. number of lending programs, amount lent, documents issued, etc.)programs, amount lent, documents issued, etc.)

– Is more directly controllable by IMFIs more directly controllable by IMF– But adverse incentives if quality not measured (e.g. But adverse incentives if quality not measured (e.g.

churn out loans)churn out loans)

Thus, while indicators provide useful information, Thus, while indicators provide useful information, they’re unlikely by themselves to provide an they’re unlikely by themselves to provide an alternative to existing governance frameworkalternative to existing governance framework

Another way of Another way of evaluating performance: evaluating performance: independent independent assessmentsassessments Independent Evaluation Office (IEO)—a Independent Evaluation Office (IEO)—a

possible model:possible model:– Generally headed by outsider, separately staffedGenerally headed by outsider, separately staffed– Independent of staff and management, reports to Independent of staff and management, reports to

BoardBoard– about 3 major reports per yearabout 3 major reports per year– Evaluates only programs that have been completedEvaluates only programs that have been completed

—no involvement in ongoing operations —no involvement in ongoing operations – Work program, issues papers, evaluation reports, Work program, issues papers, evaluation reports,

Board reactions made public, comments invitedBoard reactions made public, comments invited Not intended to be part of governance Not intended to be part of governance

structure, but to contribute to “learning structure, but to contribute to “learning culture” culture”

How could evaluation go How could evaluation go beyond the IEO’s current beyond the IEO’s current role? role? Evaluate Board as well as staff and Evaluate Board as well as staff and

management decisions—would management decisions—would require independence from Boardrequire independence from Board

More uniform coverage of More uniform coverage of evaluations evaluations

Clearer criteria for evaluationClearer criteria for evaluation Explicit link to governance Explicit link to governance

But significant degree of But significant degree of political control may be political control may be inevitableinevitable Inherent limitations to ability to Inherent limitations to ability to

establish other methods of establish other methods of accountability accountability

Realistic that countries would Realistic that countries would want some direct involvement, want some direct involvement, given issues that are often at given issues that are often at stake stake

Political involvement gives clout Political involvement gives clout to IMF decisions to IMF decisions

ConclusionsConclusions

The IMF’s governance is critically The IMF’s governance is critically important, but the voting structure important, but the voting structure is only the tip of the icebergis only the tip of the iceberg

Move toward less direct political Move toward less direct political control may be desirable control may be desirable

But would depend on establishing But would depend on establishing clearer accountability for decisionsclearer accountability for decisions—and this is a very difficult problem —and this is a very difficult problem