By Adrian Ineichen
New Lending Facilities and Their Impact
The IMF and the World Bank hold their annual meetings in early October in Istanbul. In the last two years in response to the global financial crisis, both institutions have revamped their facilities and increased their lending for ailing countries since the start of the current global financial crisis.
The IMF has increased the amount of its concessional loans – e.g. loans with below-market interest rates – particularly to poor countries (expected US$ 8bn in 2009/10 and up to US$ 17bn through 2014), besides interest payment cancellations until 2011, and new SDR allocations with which low income countries could borrow approximately US$ 18bn. At the same time, conditionality for some facilities has been reduced, which could make sense if a country sees itself in a liquidity crisis due to contagion.
While this sounds good and may help poor countries to cope with the current crisis and polishes the fund’s reputation (who wants to be the bad guy who tells you your what you did wrong anyway?) it may hurt the IMF’s mission in the longer run. One can expect that borrowers will pressure in the future for more forbearance, less conditionality and more concessionality: If you give a finger, the other wants your whole hand. What happens if more money induces moral hazard and countries that got into the crisis due to exogenous shocks (and not due to imprudent domestic policies) become addicted to loose macroeconomic policies?
Another big theme is governance reform at both international financial institutions (IFIs). While it seems certain that developing countries will gain influence in both the IMF and the World Bank, the details by how much are less clear (proposals vary from three to seven percent). The International Monetary and Financial Committee (IMFC), which is an advisory body that provides some policy guidance for the IMF, calls for an at least 5% shift of voting power to developing countries. There are currently five formulas in use to determine quotas (and thus voting power), there are basic votes and we can expect pushback by some potential losers (who wants to give up influence voluntarily?) … it is going to be very complicated to find a new formula, arithmetically and politically, by early 2011.
Will this voting power shift have an impact? European countries are overrepresented in terms of voting power, but decreasing their shares may not change the balance of power crucially. Proposals to install one seat for the EU are doomed, as this may not just raise legal issues but Europe would emerge as effective second veto power (as one joint EU seat will likely have more than 15% of voting shares) and smaller European countries would be marginalized inside an EU block. This matters because those small European countries that currently hold own Executive Director (ED) seats (Belgium, the Netherlands, Sweden and Switzerland) so far are as heads of country groups incentivized to certain represent some developing countries to some degree, otherwise they would lose their seats.
If the new voting power structure inherits the current country-group structure, probably not much is going to change as the change of the voting power inside such country groups may be too small. However, some proposals call for a reduction of the Executive Board from currently 24 to 20 EDs which would necessarily lead to changes in country groups and could increase the influence of some developing countries. Whether this is beneficial for their interest representation as a whole will be interesting to see. A cautious view might say that low- and middle-income countries do not always have overlapping interests and some may not have the means (or the political will) to shoulder the burden – e.g. contributing hard currency for SDR allocations or ad hoc contributions – that comes with increased influence (which is why some developing countries apparently signal that they may want more voting power, but could live with the ED seats still being held by some small European countries who have the means to take over responsibilities and may be more receptive for concerns of the poor).
A thorny issue which has not been addressed in earnest so far is the selection of the top leaders of both IFIs. The hitherto practice of selecting an American as President of the World Bank Group and first Deputy of the IMF, a European as Managing Director of the IMF and a Japanese as second Deputy of the IMF has excluded other regions. If granting developing countries more weight is meant to be serious, then the election of the top leadership should be opened up, made more transparent and allow for the election of capable people from so far neglected countries.
Interestingly, the Chinese already seem to prepare a senior banker, Zhu Min, for a potential top post at the IMF. Zhu was executive vice president at Bank of China, one of China’s top four commercial banks, and has recently been named vice governor at the People’s Bank of China (the central bank).
Surveillance and Early Warning
Another key issue is rebalancing the world economy. After the traditional surveillance mechanism (under Article IV of the IMF Articles of Agreement, i.e. the “constitution” of the fund) has sprawled and let the IMF to gradually broaden its surveillance activity beyond its core function (of examining exchange rate regimes), the multilateral consultation process was launched in 2007 to bring in more transparency, and (mutual) pressure on countries. However, this mechanism was not successful.
One of the characteristics of the current crisis is the imbalance between Western countries (particularly the US) countries consuming beyond their means (and thus having an enormous trade deficit and a low savings rate) and emerging market economies that have trade surpluses, relatively high savings rate and thus accumulate a lot of foreign exchange reserves which has flooded back into the US and provided the means for imprudent overlending.
The G-20 pushed for more surveillance measures and the installation of an early warning system that ideally could raise red flags before another global crisis breaks out. While this sounds nice, its implementation is very difficult. First, early warning systems tend to be modeled according to the last crisis and thus may come with an inherent bias (which may lead to neglecting other trends). Second, technological improvement could lead to market innovations which are per se difficult to anticipate, and even more to estimate their potential impact (who thought that “subprime” could cause a global crisis?). Third, even if beefed up surveillance works, political decisions to move may not be forthcoming (who wants to end a party, or prick a bubble, if it is in full swing? Who wants to admit that he has pursued a wrong-headed policy and shift course?).
Ideas are floating around for rebalancing the world economy. But to which degree are feasible, is an open question. Affaire à suivre…
IMFC Press Release http://www.imf.org/external/np/sec/pr/2009/pr09347.htm
IMF Lending to the Poor http://www.imf.org/external/np/exr/facts/poor.htm
The Chinese prepare Zhu Min for a top role in the IMF http://online.wsj.com/article/SB125585629799792513.html
Critical Voices and Civil Advocacy Groups:
Bretton Woods Project on the IFI Annual Meetings October 2009 http://www.brettonwoodsproject.org/art-565422
Bank Information Center on the IFI Meeting October 2009 http://www.bicusa.org/en/Article.11378.aspx