"Downton Abbey." (AP Photo/PBS, Carnival Film & Television Limited 2012 for MASTERPIECE, Nick Briggs)
"Downton Abbey." (AP Photo/PBS, Carnival Film & Television Limited 2012 for MASTERPIECE, Nick Briggs)

The previous post argued that to make progress on IMF governance reform requires a clear-headed perspective on the role of the IMF in the early decades of the 21st century and its relationship with the G20. It concluded that the challenge is to identify what the Fund must do to advance the mutual interests of its members in the first half of the 21st century and draw a mapping between these roles and responsibilities and quotas and other elements of governance reform.

All this is easier said than done. Some very smart people see the need for the Fund to become larger, much larger, to deal with the vagaries of fickle international capital flows — in effect, to provide an international lender of last resort analogous to that provided by domestic central banks at the national level.

Other equally-smart people draw precisely the opposite conclusion: fund lending, they believe, should be tightly constrained so as to create the incentives for the voluntary, timely restructuring of private sector claims. Their worry is that, in the absence of a framework for the timely, orderly restructuring of sovereign debt, the prospect of IMF financing creates incentives for private borrowers to delay restructuring and sovereign borrowers, hoping to avoid the dislocation of a payment's disruption, to gamble for redemption.

But as difficult as this basic issue is, there are, arguably, even more challenging issues to resolve. First and foremost is the question of IMF surveillance over members' policies. This is probably the clearest example of the link between the form of IMF governance and function of IMF activities. If the IMF is not viewed as credible, effective and legitimate, members will be reluctant to adhere to its strictures.

Of course, sovereign states, which jealously guard their independence, are loath to subordinate their discretion to some supranational body, however well-intentioned and laudable its mandate. In this respect, to make progress on IMF governance reform, it is important to get the relationships right: the Fund does not exist as an independent, sovereign institution. It is, rather, a locus of obligations and responsibilities to which members mutually consent; see an earlier post, here.

This is where the G20 comes in. The G20 is a coordinating committee by which independent sovereign states agree on joint action to the mutual benefit of all. Former Fund colleagues may not like to hear it, but the IMF is an agent to its political masters.

For fans of the wildly-popular Downton Abbey series, the relationship might be thought of as that between the Lord of a manor and his estate manager. The estate manger executes the instructions of the Lord, which themselves should reflect a careful balancing of the obligations and responsibilities between the manor and its tenant farmers. But a good manager will also advise the Lord on the prudent management of the estate, advising of incipient problems before they become crises. And the Lord, if he is a sensible fellow, will heed these warnings, even if they may entail costs, economies and difficult decisions.

The G20 does not, of course, constitute the whole of the Fund membership; hence the need for the IMF's own, independent governance arrangements. It would be convenient, to say the least, if the constituency arrangements at the Fund were based on G20, but it is not, I think, critical that they be so. Nor is it a fatal flaw that the G20 excludes most members of the international community. As noted previously, the Bretton Woods agreement, which is widely-viewed as the apogee of international cooperation, was made possible by the dominance of the U.S. as the global economic and financial hegemon. The simple fact is that the U.S. had the financial resources to back its bargaining position; others did not. As IMF historian James Boughton has pointed out, doggerel that circulated during the negotiations leading to the creation of the IMF put it best:

In Washington Lord Halifax
Once whispered to Lord Keynes
“It’s true they have the money bags
But we have all the brains.”

To be continued…

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