As the IMF mandate reform concludes, significant changes prove elusive. While proposed reforms for central banking and surveillance lack ambition, positions on capital controls remain inconsistent. The Multilateral Assessment Process promotes business as usual.
The IMF’s executive board is slated to report back on progress regarding the review of its mandate in relation to surveillance, financing, and the stability of the international monetary system (see Update 70) at the annual meetings in October. The review was requested by the G20 in 2009. As the IMF mandate reform process draws to a close, the major shareholders’ ambition and commitment to reform remain dubious.
Inconsistency on capital controls
The IMF’s view on unrestricted capital flows has certainly changed in the wake of the crisis, but suffers from a lack of consistency (see Update 70). In an August paper Not your grandfather’s IMF, professor Ilene Grabel of University of Denver finds that the Fund has made “positive statements about the protective role of capital controls followed immediately by warnings about their use only as a temporary, last resort, and an enumeration of the significant risks and potential long-term costs of capital controls.”
A September policy briefing by London-based NGO Bretton Woods Project points to the Fund’s scepticism, particularly towards longer-term controls, despite the formal acceptance of controls in the IMF’s Articles of Agreements. It argues that “while the renewed interest in capital controls by the IMF is a positive development, the bias within even the more accepting staff towards viewing capital controls as temporary, short-term solutions to deal with volatile capital flows is still unsatisfactory.” The board is due to discuss the subject again before the annual meetings.
Monetary reform remains open
A review of the special drawing right (SDR, see Update 65) will be discussed by the Fund’s board in October. Economist Robert Mundell has recently pressed for the inclusion the Chinese yuan in SDR currency basket.
The final IMF paper on reforming the international monetary system – focussing on the supply of reserve assets, including promoting emerging market reserve assets, and enhancing the role of the SDR – is still pending.
The promotion of increased emerging market currency reserves in the international system was favoured by a late June report of the Asian Development Bank and Columbia University’s Earth Institute. The report says the “global reserve system is in dire need of reform toward a multi-currency alternative” in which Asian currencies, particularly the Chinese yuan, would play a key role.
While focussing on diversifying reserves, repeated calls by United Nations Conference on Trade and Development (UNCTAD) for a regulated international exchange rate system remain ignored by the IMF. The 2010 UNCTAD Trade and development report argues that “An internationally agreed exchange-rate system aimed at ensuring stable and sustainable real exchange rates for all countries would go a long way towards reducing the scope for speculative capital flows [and] would greatly reduce the need for emerging market economies to hold international reserves as a means of self-insurance against currency crises.”
Rethinking central banking?
In an attempt to address public concerns about financial regulation, the IMF has recently reengaged in the question of central banks’ mandates. After decades of defining price stability rather than financial stability to be the central objective of central banks’ monetary policies, the crisis weakened mainstream economists’ positions (see Update 70).
In July, IMF executive directors considered a policy paper on lessons from the crisis for central banks. They agreed that, “increasing efforts should be made to monitor and assess systemic financial developments and risks.” On the basis of such analysis, interest rates could be used by central banks in a “limited” way to “lean against the wind” and prick asset bubbles. Although this will now become official IMF policy, the board stressed that inflation targeting will remain the primary objective of central banks.
The board did not move far from the IMF staff position note set out in a paper in late July. It questions the effect of monetary policy on financial stability, saying that “the impact of monetary policy on bank risk taking is likely to differ across countries and time and be dependent on local banking market conditions”.
Given the financial crisis and the obvious failures of the financial architecture, including central banks, the Fund’s recommendations on central bank responsibilities appear to be hardly more than token gestures.
A July paper by Kanaga Raja of news service SUNS called for a new role for monetary policy. Rather than maintaining its exclusive focus on inflation, monetary policy “should also explicitly take into account growth and financial stability issues in order to minimise the impact of shocks to the economy.”
The board concluded its discussion on reforming the IMF’s role in multilateral surveillance in early September.
Agreement was reached on increasing the synergies among the IMF’s various multilateral surveillance products, including to “enhance integration between the Fund’s macro-financial analysis” in the World Economic Outlook and Global Financial Stability Report. More reluctantly, the board agreed to strengthen the Fund’s spillover analysis which will assess the external impact of a country’s economic policy. The Fund’s work plan now envisages the preparation of five spillover reports on a trial basis over the next year, covering China, the eurozone, Japan, UK and US. No agreement was achieved on the Multilateral Surveillance Decision proposed in March to “create clear expectations – for staff, management, and the world at large – about the Fund’s role in conducting multilateral surveillance and analyzing spillovers” and to “provide a framework to engage with policy makers across countries.”
In an August paper, Claudia Maurini from the Bank of Italy argues that the lack of ambition regarding progress on multilateral surveillance is rooted in the Fund’s governance structure (see Update 72). She finds that “the Fund can exert more discipline on smaller and less powerful countries than in the bigger ones. … At the same time bigger countries are precisely those whose policies generate more international spillovers and affect more the global stability.”
Business as usual under MAP
While progress on reforming its surveillance mandate remains weak, the Fund has increased its technical assistance to the G20. In November 2009, the G20 asked the IMF to coordinate a Mutual Assessment Process (MAP, see article ).
At the G20 Toronto summit in June, IMF staff presented two alternative policy scenarios under the MAP, capturing potential G20 macroeconomic development and recommending respective policies. The upside scenario acts on the assumption of a strengthened economy as a result of G20 collaborative policy action. The downside scenario assesses the risks stemming from fiscal deficits and lower productivity and formulates policy recommendations to mitigate them.
The IMF’s scenarios have been criticised for a lack of consultation and resultant business-as-usual fiscal conservatism (see Update 72). Ben Moxham of te UK Trades Union Congress condemned the International Labour Organisation’s exclusion from the consultation process and finds worrying elements of proposed labour market reforms, including the “reform of employment insurance systems”, recommended in advanced countries in general, and the “reduction of minimum labour cost” which is proposed for advanced and emerging surplus countries.