Lagarde’s resigning brings opportunity to reform IMF

By Gao Haihong Source:Global Times Published: 2019/8/11 18:33:39

Illustration: Xia Qing/GT

With Christine Lagarde resigning as Chairperson of the International Monetary Fund (IMF), the selection of a new IMF head has become a focus of recent attention.

Traditionally, Europeans chair the IMF and Americans serve as the president of the World Bank Group. This tradition has lasted for more than 70 years. 

However, according to IMF rules and regulations, anyone is eligible to become managing director so long as the individual is a citizen of an IMF member country. 

Moreover, the international economic landscape has undergone tremendous changes over the years as emerging markets and developing countries among IMF members have increased their GDP share and contributions to the global economy.

Being a multilateral financial institution that emphasizes diversity, the IMF should ensure its governance structure aligns with the new changes.

The selection of a new chairperson is an opportunity for reform and should guarantee that the leadership is determined by the merits of the candidate, rather than by nationality.

During Lagarde's term as chairperson, the IMF carried out a series of positive reforms that made its development increasingly responsive to the changing needs of its member states. Despite this, the incoming IMF chief will face new challenges.

Ensuring the adequacy of funding sources available to the IMF is a major task for the future chief. At present, the IMF may be in danger of facing a significant decrease in resources and in the total amount of fundraising.

There are three main sources of funding for the IMF. The first is payments from member countries, referred to as quotas, the main way it gets capital. This accounts for half of the total funding capacity of the institution. The second is multilateral arrangement under the New Agreement to Borrow, which is a temporary expansion set to end in November 2022. The third is bilateral borrowing, another supplementary fund that will expire at the end of 2019 or 2020. 

Both temporary agreements will end soon if there are no further extensions, thus the funds available to the IMF will be reduced by half.  

This year is the 15th general review of member quotas for the IMF. At the IMF spring meeting in April, member countries did not reach an agreement on increasing the quotas, and the outcomes of the upcoming autumn meeting are not optimistic either. The IMF is a quota-based multilateral institution and the adequacy of the quota is related to its legitimacy.

How to foster quota distribution reform and improve the quota formula is a hugely important challenge for the new chair. 

The quota allocation, which determines the voting power of member states, is related to the amount of capital contributed. The quota allocation is based on the quota formula, which takes into account the relative weights of variables such as output, trade, openness and reserves of member states. 

The formula currently used was agreed in 2008, and in some respects it needs to be adjusted according to the dynamic changes of members' economies. In addition, the IMF's toolkit needs to be updated to accommodate new needs, including increasing the types of aid tools, focusing on precautionary funding support and the needs of low-income countries.  

The economic surveillance function of the IMF should keep up with the times. The content monitored should cover important factors that have influence on the global economy, financial stability and sustainable development. The monitoring approach should be more effective, specifically in strengthening cooperation with other international financial institutions such as the World Bank. It is important to enhance collaboration with major regional financial arrangements, such as the European Stability Mechanism and the Chiang Mai Initiative Multilaterlization.

The IMF needs to maintain its core position as the global financial safety net, not only by carrying out its own reforms, but also by cooperating with other international-level institutions to effectively provide a strong guarantee for global financial stability.

The author is research fellow at the Institute of World Economics and Politics under the Chinese Academy of Social Sciences. For more discussion on the IMF reform, read Haihong Gao and Kevin P. Gallagher "Strengthening the International Monetary Fund for Stability and Sustainable Development," submitted to Taskforce of International Financial Architecture for Stability and Development/Crypto-assets and Fintech, T20 Japan 2019.

Posted in: INSIDER'S EYE

blog comments powered by Disqus