A Medium-Term Strategy for the IMF: Meeting the Challenge of Globalization

Since its founding in 1944, the international community has asked the IMF to continuously adapt its activities and operations to handle a wide variety of new challenges: the breakdown of the Bretton Woods system of fixed exchange rates; the oil crises of the 1970s; the debt crisis of the 1980s; and the emerging-market crises of the 1990s. Over the years, the collapse of the state-run economies of Eastern Europe and the challenges facing heavily indebted poor countries have also prompted new directions for Fund assistance.

The relatively benign economic and monetary conditions in the new century so far, and the milestone of the IMF’s 60th anniversary in 2004, have provided an opportunity to reflect on the state of the institution and to look ahead. Some of the questions to consider at this juncture include:

• Have the challenges of the past decade pulled the Fund in too many directions, straining the original vision of an institution devoted to international monetary stability and the financing of temporary balance of payments problems? For example, the emerging-market crises of the 1990s elicited major initiatives on standards and codes, data transparency, and financial sector assessments, while the response to 9/11 pushed the Fund into combating the financing of terrorism and money laundering. The Fund’s role in low-income countries has also expanded dramatically.
• Has the accumulation of new mandates, without eliminating old ones, made it difficult to allocate resources effectively and to stay ahead of emerging challenges?
• Is the Fund fully prepared to meet the great macroeconomic challenges that lie ahead? These include tackling unprecedented global imbalances, responding to capital account crises caused by abrupt shifts in global asset allocations, and helping all members, especially low-income countries, to grow by integrating into the world economy.

If the Fund is to remain in step with a rapidly changing world, it must identify an organizing principle that defines its mission and prioritizes its elements. It must outline a strategy that explains how the Fund might reorganize itself to meet its objectives with concrete actions and outcomes for the next 3–5 years. Moreover, it must do so in a way that addresses the concerns of the entire membership.

Upon joining the institution in June 2004, IMF Managing Director Rodrigo de Rato launched a strategic review to consider how best to redefine the role of the institution. A first report on this issue was published in September 2005, sparking a lively internal as well as public discussion about the appropriate role of the institution and changes needed to discharge that role effectively. Since then, much work has been done to bring more precision to the ideas set out in that strategy. The priority has now shifted to implementation, and a new report by the Managing Director, to be considered by the IMFC at its spring meeting on April 22, makes specific proposals for moving ahead.

The proposals put forward in the new report cover the following issues:

1) New directions in surveillance. The difficulties in tackling unprecedented global imbalances and the challenges facing individual countries underscore the need for stronger exercise of the Fund’s policy analysis and advice to its member countries, a process known as surveillance.

At the global level, this means doing more to identify—and promote effective responses to—risks to economic stability, including from payments imbalances, currency misalignments, and financial market disturbances. The Fund needs to sharpen its advice to countries whose economies can have a regional or global impact, especially where there are vulnerabilities that could affect world financial markets. Specific proposals to make global surveillance more effective include: (i) a new approach to multilateral consultation to facilitate discussions within groups of countries on issues of systemic importance; (ii) broadening the IMF’s internal consultative group on exchange rates to all major emerging market currencies; (iii) strengthening the analysis in the World Economic Outlook and Global Financial Stability Report of macroeconomic risks and their interactions; and (iv) formulating regional work plans, focusing on the main policy issues facing the region.

At the country level, it means choosing focus and effectiveness over comprehensiveness, with deeper analysis of financial systems, a multilateral perspective to surveillance, and more regional context and outreach. Specific proposals include: (i) elevating the coverage of financial sector issues in Article IV reports; (ii) instituting rolling multi-year surveillance agendas; (iii) streamlining Article IV reports in alternate years for selected countries; and (iv) increasing the multilateral dimension of Article IV surveillance through a strengthened focus on spillovers and cross-country experience.

2) The changing role of the Fund in emerging market countries. In the many countries that have already emerged to become major global players, the main priority must be to augment candid and focused macroeconomic analysis with enhanced surveillance over financial and capital markets. At the same time, the Fund can do more by way of crisis prevention and response.

Specific proposals for crisis prevention include: (i) clarifying the framework for high-access Fund financing in situations other than capital account crises; (ii) allowing for high-access contingent financing through a new instrument available to countries with strong macroeconomic policies, sustainable debt, and transparent reporting, but still facing potential balance sheet weaknesses and vulnerabilities; and (iii) standing ready to support regional and other reserve pooling arrangements, including by signaling sound policies.

Proposals for crisis resolution deal with the complications of rare but important cases of sovereign debt restructuring and arrears. The report reaffirms the basic principle that an insistence on progress toward resolution of external payments arrears as a condition for IMF lending remains appropriate. Beyond this, the report (i) proposes that financing in debt restructuring cases should depend on an agreed medium-term fiscal envelope and macroeconomic framework on which the Fund expresses a clear view; and (ii) calls for a review of the good faith criterion and related aspects of the lending-into-arrears policy.

3) More effective engagement in low-income countries. In recent years, great strides have been made in contributing to economic development through poverty reduction strategies and the Poverty Reduction and Growth Facility. More flexible instruments of IMF support have recently been introduced. The U.N. Millennium Development Goals (MDGs), which seek to halve key poverty indicators by 2015, are receiving much attention, with the Fund and the World Bank called on to monitor and report on progress. One of the challenges ahead will be to marshal the expected rise in aid flows, including from debt relief, to achieve higher growth and the MDGs. Helping countries do so requires a deeper but more focused engagement by the Fund, including new understandings with the World Bank and other agencies on the division of labor.

The Fund’s strategy for low-income countries requires more work in the following areas: (i) focus and flexibility—the Fund should focus on macrocritical issues tailored to individual country circumstances, broaden its division of labor with the World Bank, and offer more flexible lending facilities; (ii) aid and the MDGs—the Fund needs to assess whether projected aid flows are consistent with macroeconomic stability and the estimated costs of achieving countries’ development goals, and also be more forthcoming with donors; and (iii) debt relief—the Fund needs to ensure that the beneficiaries of debt relief do not again accumulate excessive debt. Countries’ public expenditure management systems need to be strengthened.

4) Governance of the Fund. Fair voice and distribution of quotas are central to the legitimacy and effectiveness of the Fund. Emerging market and other countries need to have a voice in the IMF commensurate with their weight in the world economy. If political support for a two-stage approach emerges, the goal of making concrete progress by the time of the Singapore Annual Meetings is within reach. The first stage could involve ad hoc quota increases for the most underrepresented members in the near term, followed by further steps at a later stage. Agreement on an increase in basic votes, which is key for strengthening the voice of the smallest members, could be part of either the first or second phase. The Fund must also address other aspects of governance, including transparent selection of management and better definition of the role of the IMF Executive Board.

5) Capacity building. Targeted efforts in this area are key to helping members implement reforms. Capacity building also needs to be part of the strategy to address vulnerabilities identified in surveillance. The Fund’s efforts to build macroeconomic institutions through technical assistance and training can be strengthened with better prioritization and country ownership.

6) Streamlining. Action is needed to control procedure and documentation, lest the work, messages, and governance of the institution be lost in a sea of paper. Many specific proposals are being considered to enable management and the Executive Board to shift attention from routine and detail to broader strategic issues.

7) Medium-term budget. The overall approach of our strategy can and must be reconciled within a medium-term budget that deals with the projected fall in the Fund's income. But even with declining real spending, it is clear that a new business model is needed to finance Fund activity in the future, with less reliance on margins from lending and more on steady, long-term sources of income.

The process of reflecting on a medium-term strategy for the Fund has extended for nearly two years. The priority is now to move to implementation. After consideration by the IMFC, the proposals—some of which can be implemented quickly, others requiring further detailed work by staff, management and the Executive Board—will be integrated with the work program of the IMF.