Marriage Counseling for the G-20 and the IMF

THE relationship between the International Monetary Fund and the G-20 is symbiotic but conflicted. Like a long-married couple who habitually bicker and fight, the two can’t seem to live together – but they can’t live apart, either. The question of what to do about this relationship is coming to a head in advance of the November G-20 summit chaired by South Korea. Since the 1997-1998 crisis, Asian governments have sought to keep their distance from the Fund. It is admirable, therefore, that South Korea’s government has taken the lead in discussions about reforming the IMF’s mandate. It has contributed significantly to international thinking on the design of new lending facilities. The IMF’s crisis-prevention efforts begin with its country surveillance, as provided for by Article IV of its Articles of Agreement. The problem with these exercises is that they are regularly relegated to the “duly noted” bin: governments receive them, file them away, and go back to doing what they were doing before. A further problem is that these exercises rarely address the implications of national policies for third countries and the international system. Article IV surveillance of the United States during the sub-prime mortgage boom said little about the dangers posed by such lending for international financial markets. Article IV reviews of China have similarly said little about the implications of the country’s policies for global imbalances. To close these gaps, the IMF is now experimenting with “spillover reports” that focus on cross-country impacts. But so long as big countries, which are the main source of spillovers, show little inclination to act on the Fund’s recommendations, it is not clear that this analytical step forward will be a practical step forward as well. Article IV also gives the IMF a mandate to oversee the “effective operation” of the international monetary system. It is past time for the Fund to put some flesh on these constitutional bones. Staff and management should be tasked with producing a biannual report on the international monetary system. This report would evaluate the sustainability of current-account balances and exchange rates, and the adequacy or excessiveness of members’ foreign-exchange reserves. It would recommend policies for eliminating imbalances and describe what kind of exchange-rate and reserve changes must accompany any adjustments. It would probably be too politically sensitive for the Fund to announce by exactly how much different currencies were overvalued and undervalued, and to declare some as seriously misaligned. Instead, it could settle for offering a range of assessments. If this proved successful, it could then move toward publishing more forceful, umpire-like decisions. In order to better carry out the other half of its dual mandate, the IMF has signaled that it will ask for a further increase in its resources, to $1 trillion, up from the $750 billion agreed at the London G-20 meeting in April 2009. In the spring of 2010, the IMF committed upwards of $300 billion to Southern Europe alone. Clearly, more firepower is called for. But, in addition to more resources, the IMF needs a more effective way of deploying them. Here, with input from South Korea, it is developing plans for a Precautionary Credit Line (PCL). This would generalize and extend its Flexible Credit Line (FCL), under which countries with impeccable credentials are prequalified for automatic access to IMF credit without having to accept onerous conditions. Unfortunately, only three countries – Mexico, Colombia, and Poland – have signed up for an FCL. Others hesitate, either because they worry about not qualifying or because they remain concerned about the stigma of association with the Fund. Augmenting an FCL for countries with impeccably strong policies with a PCL for countries with reasonably strong policies might break this deadlock. Countries qualifying for a PCL would have to meet some, but relatively minimal and unobtrusive, conditions. They might have to pay somewhat higher interest rates to address concerns about moral hazard. The stigma problem could then be addressed if the IMF was authorized to pre-qualify unilaterally a swath of countries for one facility or the other. One problem with the FCL is what might happen if the IMF disqualifies a previously prequalified country. Investors could take this as an indication that policies had deteriorated significantly and rush for the exits. This danger would be attenuated if pre-qualification was not a yes-or-no decision: if there were a range of facilities for which countries could be pre-qualified, they could be moved between them as circumstances changed. But it is not clear that this would be enough to remove the danger that an IMF decision, taken in response to deteriorating country policies, could precipitate a crisis. As always, the devil is in the details. It is to be hoped that we will learn the details before the G-20 meets in Seoul in November. Barry Eichengreen is Professor of Economics and Political Science at the University of California, Berkeley. Copyright: Project Syndicate, 2010.