Within hours of the announcement of Rodrigo de Rato’s surprise resignation from the International Monetary Fund (IMF), pundits and officials started speculating about his successor. Since it is customary for the Fund to be headed by a European, the only question seems to be whether he (she is unlikely) will be British, Italian or French. However, Rato’s legacy raises more important issues for the IMF... and for
When Rato took over in 2004, the IMF’s core business was indisputably the prevention and resolution of financial crises in developing countries. From the Asian crises of 1997-1998 to the Argentinean debacle of 2002, the Fund had been busy the world over assisting countries in crisis and helping them to restructure their debt; the main discussion about the Fund’s role had been whether to transform it into some sort of court for the settlement of sovereign debt defaults, as proposed in 2001 by Rato’s future deputy Anne Krueger.
Rato had to deal with very different issues during his mandate. There has been no significant financial crisis in recent years. On the contrary, the IMF had to begin looking for ways of earning revenues other than by charging interest on the credits it extended to countries such as Argentina. More importantly, the Fund has been looking for a new purpose, and global macroeconomics has gained increased prominence. Last year, the Fund served as a venue for consultations between the
A major reason for this move is that the
For several years, the US Treasury has been trying to persuade
From a global standpoint, there are also advantages in an enhancement of the Fund’s surveillance. A ‘disorderly adjustment’ of the international imbalances (to use the standard euphemism) would involve significant economic and trade risks. It is wise to make sure that the world’s premier financial institution is equipped to deal with exchange rate matters at the multilateral level as well as vis-à-vis particular countries. However, the challenge is a significant one for both technical and political reasons.
First, the Fund will need, if not to tell, at least to hint at what an appropriate exchange rate for the Chinese currency would be. This is risky business politically, and there will be a need to persuade the Chinese government that a move is in the country’s best interest. But this is also risky technically: estimates of the renminbi equilibrium exchange rate are notoriously imprecise, as recognised in Fund research by Dunnaway, Leigh and Li. Second, the Fund is still looked at with suspicion in Asia. At the time of the 1997-1998 crisis, it was widely perceived in the region as an instrument of the
The issue goes beyond policies and raises a problem of governance. An institution whose main role is to lend and monitor the borrowers’ policies may be dominated by creditor countries. But an institution whose main role is to serve as a facilitator for global consultations, and as an arbitrator in currency disputes, needs a more balanced shareholders’ structure. From the US point of view, a straightforward way to convince the Chinese and other emerging countries that the IMF’s newly defined role is not directed against them would be to increase further their voice on its board, at the expense of the Europeans, and to float that Europe’s privilege to appoint the head of the institution will not be eternal.
This is where the Europeans have a direct stake in the debate. They also have something to gain from an adjustment of the renminbi and from a more legitimate IMF. They should, first, insist that the
Reference
Ahearne, Alan, Jean Pisani-Ferry, André Sapir and Nicolas Véron (2006), “Global Governance: An Agenda for