[stop-imf] Calomaris column: Massive Change Needed at IMF

[Robert Weissman]

Wall Street Journal - March 2, 2000

The IMF Needs More Than a New Boss

By Charles W. Calomiris, a professor at Columbia Business School and a
member of the International Financial Institutions Advisory Commission.

Appointing a successor to Michel Camdessus as managing director of the
International Monetary Fund promises to be a global opera bouffe with as
many twists and turns as a Gilbert and Sullivan plot.

Until recently it appeared that the European favorite, Caio Koch-Weser of
Germany, would win. But on Monday President Clinton announced -- to the
embarrassment of his European friends -- that Mr. Koch-Weser was
unacceptable. (He is therefore not expected to win an IMF straw vote
Thursday.) The administration then reassured Europe that it would follow
tradition and support another European. That may have come as a
disappointment to America's Stanley Fischer, acting director of the IMF
and a favorite among developing countries.

What does he stand for?

The specific controversy over a new managing director has blossomed into a
larger debate over the IMF as a whole. Members are concerned not just with
a half-century reign of European directors, but also with the insider
methods that put them in office. Changing the way the IMF anoints its
leadership will call for deep reforms of the entire organization.

Surely it's anachronistic to limit the leadership of the IMF to Western
Europe. Shouldn't citizens of the world's second-largest economy -- that
of Japan, which nominated Eisuke Sakakibara for the post -- be eligible to
lead the organization? And as economist Jeffrey Sachs has argued,
successful reformers in developing or transition economies might be the
most promising candidates, given that they have engineered reforms on
which stable emerging financial markets depend, and which the IMF should
encourage.

In addition to ending this Eurocentric gentleman's agreement, some are
calling for a new process for selecting the IMF's leader. The quota system
-- which governs the voting percentages of IMF members - -- gives
developed countries effective control over IMF policies, including the
selection of managing director. The U.S. alone controls 17.3% of the
votes.

The IMF describes itself as a cooperative providing global public goods
(financial stability, free trade and capital mobility). That rhetoric
would be consistent with a more democratic means of voting for its leader
-- perhaps a "one country, one vote" rule. In practice, however, the IMF
is more a slush fund run for, and financed by, finance ministers from the
Group of Seven industrialized countries. It's inconceivable that those
paying the IMF's bills would relinquish control over its leadership.

Hence the current dilemma. The American and European finance ministers in
large part pay for, and thus rule, the IMF. They wish to be bound by a
gentleman's agreement that, if violated, has repercussions for other
aspects of "cooperation." This might include, for example, the
understanding that the U.S. controls the presidency of the World Bank.

Realistically, what can be done? With respect to the immediate problem of
selecting a managing director, there is little point in debating voting
rules, because there is no way around the current allocation of votes and
the current list of nominees.

The best to be hoped for is a meaningful and open process of nominee
selection. Candidates should be required to state clearly their visions of
how to transform the IMF from a failed political slush fund into a bona
fide economic mechanism. To create greater openness and accountability,
those statements of intent should be made public, as should the votes of
member countries for each candidate.

In the longer run, however, more fundamental reforms are needed. The right
answer to the question How should we select someone with as much power as
the managing director of the IMF? is that we shouldn't. The world's
democracies never should have created a fund, or a managing-director
position, with such vast discretionary authority in the first place.

The IMF channels vast sums of money around the globe, selectively setting
and enforcing borrowing conditions as the political winds of the G-7
dictate. Its deeply flawed accounting rules and governance structure serve
to obfuscate its activities and protect its management from
accountability.

Most troubling of all, the IMF has become a mechanism for subverting the
democratic processes of creditor and debtor nations. With respect to
creditor nations, it is a means of circumventing parliamentary authority
over foreign aid. In debtor nations, the IMF protects powerful oligarchs
and international banks from the consequences of their own bad economic
decisions. Average citizens end up paying high taxes in support of costly
and counterproductive bailouts of domestic cronies and foreign bankers.

The real answer to the current dilemma of selecting a leader, then, is to
reform the IMF's charter. An IMF that focuses on crisis management -- with
rapid, effective liquidity assistance at a penalty rate rather than
subsidized long-term conditional loans -- would be more effective, less
corrupt and self-financing. It would also finally live up to its own
global-public-goods rhetoric. With that transformation would come an end
to the flow of slush funds from the G-7 countries, which is the main
constraint blocking the democratization of IMF voting rules.

An open debate among the nominees for managing director could be a first
step toward recognizing the IMF's inadequacies and rebuilding its
credibility. By happy coincidence, the International Financial
Institutions Advisory Commission, established by Congress last year to
propose reforms to the global financial architecture, next week will
release its detailed proposals for reforming the IMF, as well as the World
Bank and five other multilateral organizations.

The commission's hearings have underscored the need for an effective IMF.
Its report could serve as a springboard for the much-needed debate among
the candidates vying for IMF leadership about its appropriate mission and
governance structure.