Meeting Global Economic Challenge (Part-IV)

"The IMF is Adapting to Changes in the Global Economy"

Article by Dr. Zia-Ur-Rehman zia177@yahoo.com

I would like to focus to the International Monetary Fund. I said earlier that the Fund was adapting to a world in which work on crisis prevention was likely to be more important than crisis resolution. In fact, this shift is part of a broader change caused by financial globalisation that not only the Fund but all of our members, including European countries, need to adapt to. For example, financial globalisation has made possible the financing of global economic imbalances on a scale previously unimaginable. Those range from large current account deficits in Eastern European countries financed by Western European banks, to global imbalances between the United States and its trading partners. Europe has not been a major contributor to global imbalances, but they have affected it. And were global imbalances to adjust abruptly—through a sharp contraction in U.S. demand or through financial market disruptions—Europe would certainly be adversely affected. Europe can also help to reduce global imbalances. The same structural reforms that I discussed earlier, all of which are in the interests of European countries and are worth undertaking for their own sake, can also help to provide an alternative source of demand in the global economy, and—alongside actions from the other major players—help to produce an orderly reduction in global economic imbalances. Among the other aspects of financial globalisation are increased interconnectedness of economies, and increased importance of financial sectors in influencing economic conditions in many countries. In the Fund we are adapting to these developments by changing the way in which we conduct surveillance of the global economy. By surveillance, I mean both monitoring of the global economy and the Fund's discussions—consultations—with individual members on their economies. We are increasing the attention that we pay to spillovers between countries—that is, the effects of one country's action on its trade with other countries and on financial flows. We have initiated together with a number of major economies a multilateral consultation on what can be done to manage global imbalances. We are also increasing the attention that we pay to financial markets and financial sector issues. And more broadly, we are examining the foundations of our surveillance work. We want to make sure that our legal mandate corresponds to what we actually do—and what we should do—to effectively monitor the global economy and the economies of individual members. In all of these changes, we will need the support of our members, and I hope we can count on the support of European countries, whose influence in the Fund is great and who have long been articulate voices for measured change. The reforms of surveillance that I have just discussed are part of a broader, Medium-Term Strategy for the Fund, which also covers many other aspects of our work. For example, we are exploring how we can improve the usefulness of IMF support for emerging market economies, again adapting to the priority on crisis prevention. We are renewing our commitment to help low-income countries meet the Millennium Development Goals, and improving our effectiveness by focusing on what we do best, and on tasks where we can make the greatest contribution. The Fund's efforts in this area are, or course, part of the efforts of the international community, and we will be cooperating with others to promote these broader efforts. We are also reforming the way we finance our activities. For much of the Fund's existence we have financed public goods—such as surveillance and the technical assistance we provide to members—largely from interest income from loans to countries that borrow from us. As we move from a focus on crisis resolution to a focus on crisis prevention, this method of funding is no longer viable. We are therefore exploring alternative funding approaches, with the support of a group of external experts led by the former head of the BIS, Andrew Crockett. Another major change that we are making is in the Fund's own governance. At the Fund's Annual Meetings last September in Singapore, our members voted overwhelmingly in support of governance reforms that will increase our members, including European countries, benefit from an effective Fund. And to be effective, the Fund must be legitimate in the eyes of its members and of the world, and must represent all of its members the representation of many emerging market countries to reflect their increased weight in the global economy. Equally important, our members agreed that we must strengthen the voice and representation of low-income countries that continue to borrow from the Fund but have only a limited share in Fund voting. In these areas too, the support of European countries will be crucial. Some people have suggested that the governance reforms we are undertaking will reduce the influence of Europe in the management of the global economy. But these reforms are not a zero-sum game. All of our members, including European countries, benefit from an effective Fund. And to be effective, the Fund must be legitimate in the eyes of its members and of the world, and must represent all of its members.