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future of the g20 & IMF?

Monday 24 June, 2013

I checked out this event @ the Woodrow Wilson International Center in Washington DC Savior or Achilles’ Hell of International Markets: the G20, IMF, & the global financial crisis presented by Chris Legg, former executive director the Australia & Pacific constituency @ the IMF.  (We walked in a few minutes late, but don’t think we missed too much).

Chris opened with a brief history of the Bretton Woods agreement & explained how inertia has delayed changes in how IMF quotas have evolved over time, keeping the industrialized world overrepresented while the emerging markets are underrepresented.  The IMF is a rules based system that was designed for a different world to facilitate trade & not capital flows.  It uses soft terms with few obligations to create a stable system of exchange rates & prohibit exchange rate manipulation.  In it’s quest for political leadership, the role of the US is changing while the economic reality is changing as high growth rates lead to increased influence of Asia & China.

On the eve of the financial crisis, there was a misalignment between the voice & representation of the IMF.  The subsequent track record raised the following questions:

  • should there be financial sector reform?  interventions differ
  • should the IMF reform? it would be a grand reform
  • how should surveillance & policy change? it’s rules vs. ownership
  • What about governance reform? it’s been piecemeal
  • Should they be policemen or advisors?
  • Were they asleep @ the wheel which allowed the financial crisis to occur?  imbalances should have been addressed
  • Are stronger rules needed? no
  • Is improved political ownership needed?

Better analysis is needed to break down silos, but better reports is not the same as political ownership.  The G20 Mutual Assessment Process (MAP) provides a framework for growth.  It created a relationship with the fund, as uncomfortable but complementary partners & allows them to leverage technology capital, eliminate sensitivities, & allow emerging market economies (EME’s) to hedge their bets.

2010 brought fund governance reform with a shift in the quota & voting shares which resulted in a shift in power from Europe to the EME’s.  But there has been no progress as an open transparent process has been held hostage to the current share structure.  There is defeatism & division among the EME’s.  Strengthening of the political leadership & ownership has been stymied by the EME’s which are suspicious of the dysfunctional board.  Realignment of the executive board has been demanded but failed to deliver as the EME’s have been frustrated.  There has been a quota realignment with a 5% shift to the EME’s which is yet to be delivered.  It took a 1.35% “haircut” of the shares of industrialized nations as central & south america fell while China & Brazil gained.  There has been a proposal for a quota formula review, which would be a function of GDP, but that has been kicked down the road.  Unfortunately there is no incentive for long-term cooperation.  Although there is pressure on fund resources, even as EME’s assume creditor roles, no new leaders have emerged.

In the post-2009 world:

  • successes have not been implemented
  • reform has met skepticism
  • leadership has been elusive
  • rules have not led to political consensus
  • policy cooperation has made the G20 fragile

The IMF has been in protracted transition, but as the US has been compromised, it is still indispensable.  The future path is not clear, but nothing is inevitable.  Europe has weakened as China challenges.  The BRICS are still a work-in-progress.  The G20 remains essential, but may have too many deliverables as it needs to balance ambition with pragmatism.  It’s values have been tarnished by the crisis, but inertia is the bigger problem.

Q&A

There is cautious optimism about Greece, although there are no strong messages either.  Not being able to change exchange rates leads to difficulties.

Australians provide pragmatic approaches & workable solutions to compromise as it assumes leadership of the G20 next year.

The EME’s are cautious & conservative, but  there is no waiting for better governance.  They are too simplistic on ownership, while there are still domestic sensitivities which makes it easier for them to accept their consequences.

The IMF provides a dialogue among all of it’s members about exchange rates.  It promotes stability by adjustment, but it’s methodology is easy to debate.  They offer policies that are consistent for long-term growth but need more rigorouts opposition.

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