|
Köhler: back to the core issues and away from “mission creep” |
||||||
The contrast between Michel Camdessus and his successor as IMF managing director is stark.
Horst Köhler, the image of Teutonic efficiency and practicality, has already made it clear that he wants a more focused IMF that will do less, yet be poised to do it faster. The expansionary, even imperial IMF is out. A leaner, possibly meaner Fund is in.
Köhler isn’t a politician, though several of Germany’s leading political Figures were his mentors, chancellor Helmut Kohl among them.
Köhler instead sees himself as “a political civil servant, with the emphasis on servant,” according to one former associate.
A skilled diplomat who has been tested with major responsibilities in the crucible that was German reunification, Köhler reputedly has a short fuse. “Endless talk is hell for him,” says one source. “He wants his people to think; he wants them to speak out, but then he wants them to act.” Köhler’s desire to see results lies at the root of his widely reported friction with some EBRD staff during the early days of his presidency there.
“One important difference [compared with Camdessus] is Köhler’s strong wish to have the Fund concentrate on what we call core issues,” says Onno Wijnholds, IMF executive director for the Netherlands. “We were experiencing something like mission creep and he is in favour of pushing that back.” So, the IMF will become more of a macroeconomic institution again, if Köhler gets his way.
“I think that he is right to emphasize a vision that is different from the past in order to establish his reputation and style,” adds Yukio Yoshimura, Wijnholds’ colleague on the executive board who represents Japan. “What he emphasizes the most is the importance of the financial sector. He tries to integrate the global viewpoint on the one hand with individual country viewpoint on the other.”
Köhler also has said that the IMF cannot and should not try to be an international lender of last resort – a role that Camdessus would have been happy for the Fund to play. And Köhler wants to streamline IMF conditionality.
The Fund now has programmes with a huge number of requirements for countries to meet, called performance criteria or structural benchmarks. Case in point: the requirement for Indonesia to break up its clove monopoly. In some cases, the number of conditions has become so large that there is a problem of prioritizing.
“These things may be desirable, but structural reform is primarily the job of the World Bank,” says Wijnholds. “We would like to get back to less elaborate, less detailed conditionality, but then stick to our conditions.”
But pruning back bureaucracy can be a tough job. “I think that on the ground it will be very difficult for Köhler and the members to avoid excessive detail and conditionality, despite paying lip service to the notion,” said another source. “The fact is that the IMF must set conditions that respond to the problems in the economy. It’s very difficult to rule out certain types of conditions in the abstract.”
And Köhler now will need to forge a better division of labour between the IMF and the World Bank, because the Fund has been getting into areas that traditionally were the Bank’s domain and vice versa.
Camdessus had religion, literally as well as Figuratively, when it came to Fighting poverty: another mandate more suited to the development banks. Indeed the Vatican has made Camdessus an official adviser for debt reduction issues. The man was passionate about it and made assistance to poor countries one of the hallmarks of his tenure. But the messages coming from the two institutions have grown more blurred as a result.
Critics on the attack
Köhler arrives at a time when the IMF is besieged by critics. Allan Meltzer, chairman of the panel set up by the US Congress to evaluate the performance of the multilateral Financial institutions, thinks that Köhler must tackle two make-or-break issues for the future of the Fund if it’s going to be a successful institution that survives and is welcome.
Number one on Meltzer’s list is the need to get rid of corruption in recipient countries such as Russia and Indonesia. “The political consensus which supports giving additional resources to the IMF depends very much on the perception that the money isn’t being stolen by a bunch of oligarchs or corrupt dictators,” he says. “That consensus is breaking down because it isn’t clear that much of this money goes to the intended uses.”
Meltzer also argues that the Fund needs to be willing to let countries fail. The IMF has got itself into a system in Russia, Asia, Kenya and Latin America where the country promises to do something in order to qualify for an IMF loan and then the country doesn’t do it. “There’s not much point in conditions if the IMF bails out countries that don’t meet them,” argues Meltzer. “No system of reforms is going to work unless the IMF is willing to enforce the conditions or preconditions.”
| Camdessus: took the IMF deeper into developmental areas | ||||||
Meltzer notes that in Kenya the Fund put in a system to monitor the conditions more carefully and to withdraw more rapidly. “But that isn’t enough,” he maintains. “They should be willing to walk away and say: ‘Live with the problems you’ve created for yourself. We’re not going to help you, until you correct them.'” But the Fund hasn’t been willing to go that far.
Still, the IMF has taken a genuinely forthcoming approach to the Meltzer Commission’s report. “That isn’t to say that they agree with it or that they like it,” observes Meltzer. “But they recognize that they need to change and this is one way to help them see how – in contrast to the Bank which has been, to say the least, hostile to almost any suggestion of change.” Meltzer, however, believes that the Bank will be required to reform itself as well.
The impact of the Meltzer Commission’s report elsewhere has exceeded the group’s initial expectations. “Many, many people have said that the Commission’s report is the blueprint for the direction of change, whether or not they agree with all the recommendations,” says Meltzer. “Even the US Treasury’s response moves in the direction of the report. It just says that these people go too far, but the treasury actually recommends taking half of a step or a quarter step where we would take a full step.”
Three paths of change
Meltzer notes that the G7 agreed to similar approaches when it met in Fukuoka, Japan, in July. “We’re going to move in the direction of preconditions, higher interest rates and much less, if any, long-term lending,” predicts Meltzer. “Those are three major ways in which the IMF is going to change.”
Yet, the Meltzer Commission is further evidence to some that the Fund has been unfairly maligned by the political process. “The IMF has become the focal point for a lot of criticism which really deserves to be directed to the ministries of Finance of the US, Germany, Britain, France and Japan, etc,”says Richard Cooper professor of international economics at Harvard University. “Köhler isn’t really in charge, he’s only in front.”
Cooper chaired a group for the IMF that studied voting rights and quota allocations earlier this year. He points out that these major stockholders determine the policies of the Fund. “Those countries actually Find it convenient for the Fund to act as a lightning rod,” he observes. “So, they are not as aggressive as I think they should be in defending the Fund.”
The Fund has managed to make itself deeply unpopular with a lot of diFFerent groups around the world and Cooper thinks that a priority for the next few years should be to restore a favourable public image. “My impression is that it now has a good reputation only with insiders and even not with some insiders,” he says. “The IMF sits atop the Financial community, so to speak.
It’s arcane, wields lots of influence and is somewhat scary.” Cooper readily acknowledges that the Fund has made mistakes and that it almost certainly won’t get everything right in the future, but for him the real question is whether the Fund remains a socially useful institution 56 years after Bretton Woods. “Is it now a dinosaur, a historical anachronism or does it still have a socially useful role in the First half of the 21st century?” he asks. “My answer is that, with suitable adaptations, it absolutely does.”
Some of Köhler’s early signals have been decidedly mixed, when judged against his call for a narrower IMF. He has defended the traditional broad agenda – when pushed in press conferences and elsewhere – encompassing the Camdessus anti-poverty initiatives as well as policies to encourage economic development and institution building. Those jobs almost always take much longer to carry out and involve a much wider range of policies and initiatives than the Fund’s core activities of crisis prevention and crisis management.
Köhler led the IMF executive board on a retreat in July, where he outlined some of his initial plans. “The group generally agreed that the Fund should not be in the forefront in the development and poverty reduction areas,” says Wijnholds. “They grappled with the question of what to do with the IMF’s new, low-interest window that Camdessus dubbed the “Poverty Reduction&Growth Facility [PRGF].”
| Goldstein: more focus on crisis prevention and crisis management | ||||||
But Köhler and the board rejected, for now, the idea of scrapping the PRGF as politically out of the question. The Fund, instead, will place a little less emphasis on poverty reduction, but remain active in that controversial area. “I think it’s partly turf and partly the feeling that they’ll lose a lot of influence with the low-income countries if they drop that,” explains Morris Goldstein, a senior fellow at the Institute for International Economics in Washington.
So, Köhler is torn in two directions. On the one hand, there is the desire, shared by major shareholders as well as many of the Fund’s critics, for the Fund to focus mostly on crisis prevention and crisis management. On the other hand, there is the inevitable recognition that the IMF is one of a series of multilaterals that need to work together on priorities that unavoidably overlap.
“I think the Fund is going to focus more on crisis prevention and crisis management,” predicts Barry Eichengreen, a professor of economics and political science from the University of California at Berkeley who was senior policy adviser at the Fund during the Asian crisis. Eichengreen thinks that there is some likelihood that the Fund’s poverty reduction facilities eventually will be transferred to the World Bank where they can be administered in a way that is complementary to the Bank’s other development strategies. “That’s one of the few places where a clear division of labour between the Bank and the Fund makes sense,” says Eichengreen.
World adviser on upgrading
There is also a recognition, though, in the wake of the Asian debacle, that it’s essential for countries to upgrade their practices in a wide range of areas. Efforts to promulgate international standards in areas like auditing and accounting, prudential supervision and regulation, corporate governance as well as bankruptcy and insolvency codes, have turned the IMF into a trusted adviser for all of these other institutional reforms. And tension with the World Bank becomes unavoidable.
Eichengreen points out that: “The more seriously you take the notion that the Fund should be in the crisis prevention business, the broader the agenda for the institution becomes and the problem of mission creep begins to emerge.”
There’s clearly going to be an effort to enable the Fund to respond more quickly to crisis. It now takes weeks for the IMF to put programmes together under the best of circumstances. There are practical constraints on how quickly the staFF and management can process new information and on how quickly the executive board, which decides almost everything by consensus, can reach conclusions. Köhler wants improvements in this area. Yet, many are sceptical. “Personally, I have real doubts about whether that can be done successfully,” says Eichengreen.
But there’s another approach. Countries could pre-qualify for assistance, as the Meltzer Commission recommended in March. Or, the Fund could Find ways of making its contingent credit line (CCL) – now two years old – more attractive. So, far no country has applied formally for that facility.
And Köhler will face some much thornier, long-term issues, when the honeymoon is over.
There’s clearly an imbalance inside the Fund in terms of voting power. The rapidly growing emerging markets are significantly under-represented relative to their weight in the world’s international transactions. “To a Fly on the wall this looks like a European-dominated institution in terms of the people who sit around the table and speak,” says Cooper. Plenty of critics also describe the IMF as an tool of the US Treasury and even the US State Department.
“The Asian countries – China and Japan – would like more representation for other Asian countries,” adds Meltzer. “The Europeans would like to hold onto to their over-representation; and developing countries, including Latin American countries, also would like more representation.”
But developing countries, as a group, are over-represented on the basis of historic formulas, says Cooper who studied the issue for the IMF earlier this year. “And they resist very strongly any diminution of their share,” he adds. “I have some sympathy for that because they need to have a strong enough voice if the Fund is to remain a legitimate institution from their point-of-view.”
But the Fund has always been a donors’ organization because they put up the money. “It’s like the golden rule,” says Meltzer. “He who has the gold, rules. Giving donees the power to determine how the operation is run won’t be particularly attractive to the donors.”
More power for emerging nations
Most observers expect that the larger emerging market economies are going to become more powerful in all the international organizations. The Koreans and other larger emerging economies want more voting power and a seat at the table of the various groups that dominate the IFIs. “Some of that is going to come out of Europe’s hide and I think Köhler will recognize that,” says Morris Goldstein. “The reality is that the smaller European countries are going to lose weight, but the smaller G7 members and maybe even Japan might give up a little as well. Five years from now, I would expect to see fewer European faces in the key economic forums.”
But politics will prevent the quota structure from changing very radically. “Maybe the way to deal with this is to agree that quotas will be reconsidered on a regular schedule every couple of years,” says Eichengreen. “That would let us take a series of small steps that, at the end of the day, will lead us down that path we need to follow.”
For now, no one is entirely happy with the existing IMF quotas. “But that’s probably a good sign,” says Cooper, “as long as the level of discomfort is roughly evenly spread.” And that leaves the G7 still very much in control.
They issued a very detailed statement after the Fukuoka summit about IMF reform that, predictably enough, upset many developing countries.
Köhler said that it would have been better had the G7 tabled their proposals to the IMF executive board. “It’s clearly not feasible in the short run to push for radical changes in voting shares or to make the executive board more independent,” says Eichengreen. “All that can be done is to get the principal shareholders to work through the institution rather than trying to set the agenda beforehand and deliver it to the Board as a fait accompli.”
The issue of private sector burden sharing – trying to get the private sector to participate in or contribute to crisis resolution – is still the toughest nut for the Fund to crack. Eichengreen, in a paper published this month by London’s Centre for Economic Policy Research (Can the moral hazard created by IMF loans be reduced?), concludes that Efforts to significantly enhance the participation of the private sector in crisis management and resolution have so far been a “failure”.
Meltzer is clear about the source of the problem. “If the IMF followed its own rules, we wouldn’t need a new set of ways to ‘bail in’ private lenders,” he says. “All it has to do is stop bailing out poorly run countries and say: ‘If you lend to country X and things go bad, that’s your problem.'” Meltzer, however, thinks the Fund must ensure third countries are protected, when lenders take losses because borrowers didn’t meet IMF preconditions.
| Meltzer: not much point in conditions if the IMF bails out countries that don’t meet them | ||||||
The IMF has taken some very hesitant steps in Meltzer’s direction. Ecuador, for example, let its Brady bonds default, but then the Fund returned earlier this year. “The central problem in Ecuador is that there is no political agreement among the factions,” says Meltzer. “Without that, they’re not going to stick to any serious long-term programme and bailing out Ecuador sets a very bad standard for other countries. It says that the IMF will come in and help if a country simply marks time.”
Countries must have incentives to choose reform, reasons Meltzer. The purpose of the preconditions recommended by his commission is to provide those incentives in the form of lower interest rates and more oVers to lend.
And he worries that crises will continue and possibly grow larger without them.
But Morris Goldstein argues that more is involved than just taking a tougher line with private creditors. “A key issue is how big the IMF rescue packages are going to be,” says Goldstein. “The bigger they are, the more likely that private creditors will be paid off.”
Goldstein reckons that the top priority should be to put in place a sensible system of deposit insurance for banks in emerging economies. “That is where the bulk of the lender moral hazard problem now resides,” according to Goldstein. “Next in line should be Efforts to move toward a more rules-based approach for defining systemic crises and for activating larger resources.” Goldstein also thinks that more attention to collective action clauses, to creditor committees and to internationally sanctioned standstills, in extreme cases, also would be worthwhile.
Eichengreen hopes that Köhler will try to solve the problem of chronic borrowing by the same countries. “Efforts to end long-term IMF lending to poor countries would certainly be one way for the Fund to focus its agenda more tightly,” he says. Recent proposals for IMF lending rates that rise with the duration and size of the programme also represent attempts to extricate the Fund from a prominent role in the poverty alleviation area.
Borrowing regardless
Eichengreen, however, is sceptical that interest rate-based approaches would have much effect. “Governments have short time horizons and their goal is to survive through the next election. Countries which Find it difficult to borrow in private markets and are in desperate need of official Finance would try to borrow from the Fund almost regardless of the rate,” he says.
The IMF, along with other multilateral institutions, has made considerable Efforts in recent years setting and implementing international Financial standards as well as promoting greater transparency and disclosure.
Currency regimes for emerging economies also have improved, although that was forced by the market, not by the official sector. And the redesign of Fund lending facilities also appears to be on the right track.
The Meltzer Commission, among others, has given new prominence this year to some far-reaching changes and, for his part, Köhler clearly has a very diFFerent perspective from that of his predecessor. But it doesn’t necessarily follow that Köhler will radically remake the institution. The early indications are that he has the instincts of a moderate reformer. And the IMF, like a supertanker, can’t turn on a dime.
Köhler must reflect the priorities of his principal shareholders, while trying to give voice to the diFFerent special interest groups. He wouldn’t be able foment a revolution all by himself, even if he were so inclined. A key partner in the process almost certainly will be the Fund’s Bretton Woods twin. The truth is that both the Bank and the Fund must narrow their agendas, if Köhler is to establish credibility on reform.
The Meltzer Commission voted unanimously that the Fund’s poverty alleviation programmes should be phased out and transferred to the World Bank. “That would be easier to accomplish if the World Bank were a more reliable, more responsive, more effective organization,” says Meltzer. “Real reform of the Fund requires tremendous improvement at the Bank. But where the Fund seems anxious to look at the question of reform, the Bank seems to be anything but eager.”
So, real reform might just require another crisis. Many banks today are global and too big to fail. “We should worry about what disciplines risk in such a world,” says Meltzer. “That’s why somebody should be able to lose a lot of money in a country where they lent more than they should have. Otherwise, we’re going to have a big crisis some day.”
