The previous post commented on the Yogi Berra —"it's deja vu, all over again" — quality to discussions on International Monetary Fund reform. To recap: discussions on IMF quota reform have had a certain recurring pattern to them; to secure IMF quota reform, the zero-sum game of quotas must be embedded in the broader, positive-sum game of preserving the remarkable system of international trade and payments that has been painstakingly erected over the past 70 years.
To advance this objective a clear-headed perspective of the role of the IMF in the early decades of the 21st century and the relationship between it and the G20 is required.
Start with the IMF. Too much heat, and too little light has been created by debates on what the Fund supposedly should do. In this respect, to identify what the Fund must do going forward, it might be wise to think, retrospectively, of what the Fund was intended to do. It is pretty clear that the IMF was created to promote the public good of international financial stability. This was not, however, the ultimate objective.
The underlying objective was to provide an environment of stability that would facilitate the kind of progressive trade liberalization that reduced average tariff levels from the Depression-era levels of, say, 40 percent to the GATT-facilitated levels of about 5 percent. International financial stability (and monetary cooperation) was required to facilitate this remarkable liberalization because nobody would reduce tariffs if others could gain a competitive advantage through monetary-induced exchange rate depreciation. These were the large gains to divide.
Now, people can debate that the IMF should promote development. But that is, I think, both wrong and counterproductive. It is wrong because as currently constituted, the Fund lacks the instruments to effectively directly promote development. Of course, securing the goal of international financial stability, which facilitates to global growth, is hugely important to the goal of international development. It is counterproductive to view the Fund as a developmental institution because countries that have assigned (or 'pooled') some part —however small — of their national sovereignty in an international institution to advance one objective can reasonably take umbridge if there is a "bait and switch" as that institution is used for another purpose.
But if the IMF was not designed as a developmental institution, what was it designed to do?
Well, consistent with its mandate to promote international financial stability, the IMF facilitated the pooling of international reserves to avoid the mal-distribution of global liquidity that marked the inter-war period and which led, ultimately, to policy responses that were, in Keynes' evocative language, "destructive of national and international prosperity." If, in times of stress, countries had ready access to internationally-accepted liquidity on reasonable terms, they could be convinced to eschew policies to shift the burden of adjustment on to others through discriminatory restrictions on trade and payments. These were the large losses to avoid.
The prudent management of the "social contrivance" of money would, Keynes hoped, allow countries to pursue policies consistent with full employment. Moreover, by pooling international reserves, the IMF would allow members to economize on their holdings of gold, which Keynes viewed as a "barren asset," freeing resources to be applied to social ends offering higher returns (think, for example, of schools, hospitals and other public infrastructure).
The Fund, in short, is a financial institution with a clear financial mandate. It is not a political body, such as the United Nations. This has clear implications, which should not require exposition, on the quota debate.
Going forward, therefore, the challenge is to think clearly and dispassionately of what the Fund must do to advance the mutual interests of its members in the first half of the 21st century. Then we have to draw a mapping between these roles and responsibilities and quotas. Different roles would, it is fair to say, have different implications in terms of quotas and other elements of governance reform, more broadly.
The next post explores the role of the G20 in this process.
