The IMF: Change in the Air?

IMF Managing Director, Christine Lagarde. Photo credit: CNN

This year’s G20 (Group of Twenty) Summit – an annual forum where the world’s twenty largest economies discuss international economic cooperation – took place in Brisbane Australia. Several commitments on boosting global growth, reducing inequalities, attaining inclusive growth, creating jobs and even establishing a Global Infrastructure Hub were made.

What particularly caught my attention in the communiqué was item 15, the commitment on reforming the International Monetary Fund (IMF). This is an issue this blog has broached a number of times.

Here’s an excerpt from item 15:

The G20 must be at the forefront in helping to address key global economic challenges. Global economic institutions need to be effective and representative, and to reflect the changing world economy. We welcome the increased representation of emerging economies on the FSB and other actions to maintain its effectiveness. We are committed to maintaining a strong, quota-based and adequately resourced International Monetary Fund (IMF). We reaffirm our commitment in St Petersburg and in this light we are deeply disappointed with the continued delay in progressing the IMF quota and governance reforms agreed in 2010 and the 15th General Review of Quotas, including a new quota formula. The implementation of the 2010 reforms remains our highest priority for the IMF and we urge the United States to ratify them. If this does not happen by year-end, we ask the IMF to build on its existing work and stand ready with options for next steps.

Whether these changes will happen or not is another matter entirely. However, the fact that increasingly, the need for change is being loudly articulated at the G20 is timely and significant.

For decades, developing countries have objected to the domination of international organisations by a handful of countries in Europe and North America. An informal arrangement exists where the head of the IMF traditionally comes from a European country, while the World Bank in reserved for North America. Board compositions and voting rights are similarly in favour of the industrialised, and mostly Western countries.

Talks about ensuring greater representation within these institutions, as well as the United Nations Security Council have stalled for years.  No doubt, there is a need to ensure that global governance organisations are more reflective of the very fast changing world of today.  If anything, attempts to establish ‘alternative’ development institutions such as the BRICS Bank mean that such concerns can no longer be ignored.

The need for a new approach in general, not just in governance and management, was underscored by the IMF head, Christine Lagarde in a speech at the Annual IMF/World Bank Annual Meetings in October this year. On the financial sector, she said:

We have made good progress, especially on banking regulation. Yet we still need to overcome the too-important-to-fail problem. We need better rules for nonbanks, better monitoring of shadow banks, and better safety and transparency over derivatives. We need to strengthen macroprudential safeguards.

And let’s be candid: we need to see a change in culture and behavior. We need to move away from the myopic mentality that led to the crisis—the tendency to prize profit over prudence, self-interest over service, excess over ethics.

On global cooperation:

Yet you also know that the global economy is undergoing radical shifts. Fifty years ago, the emerging markets and developing economies accounted for about a quarter of world GDP. Today, it is half, and rising rapidly. During the global crisis, it was the emerging markets that contributed most to global growth.

This diffusion of power is not restricted to nation states. Aided by technology, we also see the rapid rise of a more diverse network of global stakeholders: NGOs, cities, and even citizen activists. Powered by social media, they have proven their ability to force policy change.

This new reality demands a new response—but not a new philosophy. It requires us to update, adapt, and deepen our modes of global cooperation. It requires using the wonders of technology for the betterment of humanity. It requires what I have a called a “new multilateralism”.

It is therefore a welcome development to see the G20 underscore this important point. Realistically, it would be great to hear the same call made at the next summit of the smaller and probably more powerful Group of Eight (G8).

After all, a more representative, inclusive and democratic global governance system will be better poised to coordinate efforts towards attaining more inclusive growth, and more representative and democratic societies.

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