A Bold Reform of Global Financial Governance

Posted by Biagio Bossone on 8 February 2009

Having spent several years on either side of 19th Street in Washington, being part of the operation of the IMF and the World Bank, I have grown the conviction that the central role of the two institutions in world finance and development must be strengthened. This is not because, there inside those self-centered bureaucracies, my mind has been obliterated into believing that they are irreplaceable, but because they remain, at least for the time being, the only foundation to the hope of a truly multilateral system of global economic governance. The two institutions are often criticized for being ineffective, autocratic, and weak with the strong as well as strong with the weak. Yet their deficits of effectiveness and democracy, as much as their lack of evenhandedness, largely owe to the leading countries’ unwillingness to live up to the multilateralism upon which they were founded.

Ted Truman put it very candidly in his recent commentary,[i] recognizing that the IMF promise has been damaged by the pursuit of narrow national interests, non appreciation of the impacts of globalization on weaker economies, and worldwide perception of the IMF as the tool of the US and Western Europe. The external direction of the global financial institutions from non-representative groups of countries–which has become so pre-eminent especially since the mid-1990s–has fed the impression of an international system that fails to serve the interests of all its members evenly. Many governments recognize the need for common rules to govern domestic economies in the global context, but strongly resist the creation of new international obligations. Developing and emerging market countries have a deep-seated concern that new rules would reflect the interests of the industrial countries, and be applied in ways that restrict their competitive and developmental capacity, with the IMF and the World Bank acting as enforcers on behalf of the industrial countries. This lack of trust undermines international cooperation, and needs serious repair.




Truman advances bold proposals to reform the IMF, including important aspects of its governance. Accepting them would reflect a renewed international interest in financial multilateralism. That being the case, even more ambitious steps should be contemplated, under the principle that global decision making on international financial matters should take place within the Bretton Woods institutional framework as the only existing universal system of multilateral financial relations. The reform should place the IMF system at the core of international cooperation for financial stability, and make its governance more effective and responsive to its universal responsibilities.[ii] My recent studies on the performance of the IMF governing bodies (the IMFC, the Executive Board, and Management) indicate the following:[iii] 
International Monetary and Financial Committee
The IMFC’s role has been systematically weakened by the leading countries’ tendency to keep decision making on the international financial system outside of the IMF system. While the committee is an expression of a (nearly) universal institution, it is neither the crucible for new policies nor the forum for coordinating collective action–roles that have been appropriated by less legitimate international entities (starting with the G10, and continuing with the G5/7/8 and now the G20 and the FSF). As a ministerial body, many believe the IMFC grants political legitimacy to IMF strategic directions. Also, by asking the IMF to report periodically on its activity, it is seen to exercise a function of global accountability vis-à-vis IMF members and stakeholders. However, the committee does not hold responsibility to oversee the IMF or to hold the IMF accountable for its outcomes. As a leading body, the IMFC has not been noted to make distinctive contributions in terms of international policy guidance, agenda setting or strategy making, with only few exceptions.
The Executive Board
The Board operates more a diligent agency on behalf of members, ensuring good design and execution of the IMF mandates, than as a collegial body of IMF administrators. Executive directors generally act as representatives of the countries that elect or appoint them, and take their loyalty to be toward their national authorities, instead than to the IMF membership as a whole. Such factors as less than high seniority, undefined terms of reference, short duration of mandate (for those who are elected) or duration at the pleasure of the authorities (for those who are appointed), as well as the desire to preserve good relations with home administrations for career purposes, reinforce their subjection to capitals. The IMF board thus tends to be directed by decisions taken by few country officials motivated by their national interests or by what they think is in the world’s best interest. Over the years, control of the board from the major industrial countries has intensified, lessening the room for internal debate and consensus building. Executive directors work independently of one another; they hardly ever integrate their knowledge and information to look beyond the reports prepared by the IMF staff, and seldom broaden their discussions outside the perimeter set by Management. Their interaction is inadequate to deliver effective oversight of IMF work, and to project a broad vision of issues.
IMF management (that is, the Managing Director and his three deputies) is central in steering IMF policies, thanks to its control over a highly knowledgeable staff, direct access to top national policymakers, a high-profile public relations role, and its role as chair of the board. A major problem is its limited accountability. First, although mandated to oversee Management, Executive directors are reluctant to challenge a Managing Director who enjoys a far superior status than theirs, is not selected by them (irrespective of the IMF charter), and has direct contacts with the highest-level authorities in the countries they represent (which they themselves may not have). In some cases, directors who had challenged Management were even rebuked by their capitals; in other cases, directors representing borrowing countries refrained from making criticism that could upset their countries’ relationship with the IMF. Second, the role of the Managing Director is beset by a conflict of interest: as chief executive of the institution, he is responsible for Management performance; as chair of the board, he is responsible for holding Management accountable for its performance. He has therefore no institutional incentive to enforce Management accountability.




The reform should intervene on all governance levels of the IMF system. Clear responsibilities should be attributed to each governing body, avoiding role duplications, exploiting comparative advantages, and enhancing complementarities. A configuration would emerge where the IMFC would become the locus for international policy coordination, the board would be the independent oversight body of the IMF, and Management would be made accountable.
The IMFC as the “Global Country Forum”
The IMFC is the only multilateral financial body of a manageable size that represents (nearly) all world countries and brings together top national officials with monetary and financial policy responsibilities. It thus provides the most appropriate forum for countries to discuss international financial policy and decide on collective action (Portugal, 2005). All agencies active in this area (like international organizations, country groupings, standard setting bodies, and industry associations) should report or refer to it. As the highest policy forum for member governments, the IMFC would monitor country cooperation based on IMF assessments, and intervene where necessary to strengthen cooperation through peer pressure. The IMFC would be the vehicle to translate the conclusions of IMF multilateral surveillance into policy action by members. Finally, the IMFC would identify areas for the IMF to improve its responses to members’ needs, and would request the IMF board to take appropriate action. It would then hold the board to account for IMF performance.[iv] Reforming the committee’s composition and working practices should be in order.
An independent Executive Board
The board should make sure that the IMF serves the interests of all its members effectively and evenhandedly. It should act as a diaphragm between individual country interests and the institution’s principles and global objectives. This presupposes greater independence of executive directors. As administrators, they should be able to express their own judgment, having as reference the interests of the membership, and should not be expected to act under instructions from individual countries. Their offices should not be extensions of ministries back home. Their work incentives should be modified accordingly, providing for very high seniority and professional reputation, a considerably longer tenure than the current two years, and a non-removal from office rule (except for unethical conduct). Directors should be in a position to explain openly why they have taken certain decisions, and in whose interest. This would require transparency of board procedures. They should not get involved in formulating policy recommendations to member countries.
Recent proposals–inspired by King (2006)–recommend shifting to a nonresident board and granting more independence to Management. In my opinion, such solution would only wipe out the board’s already weak collegiality, and further magnify the influence of the IMF’s largest members. The institution would be left in the hands of a management that would be accountable only to few powerful countries, and the original intention of the IMF founders of a board that balances independence of judgment and accountability to members would be lost completely.
Accountable Management
Two measures should be introduced. First, the function of board chair should be separated from that of chief executive officer. The board should be chaired by an eminent person selected by the governments, and management should report to a CEO selected by the board. Selections should be transparent and open. Second, the board should adopt a process of periodic evaluation of management performance.[v]



Portugal, M., 2005. Improving IMF Governance and Increasing the Influence of Developing Countries. G-24 Technical Group Meeting. March 17‑18. Manila. http://www.g24.org/Portugal.pdf
High-Level Panel on IMF Board Accountability, 2007. Key Finding & Recommendations. April 10.
Arlington, VA: New Rules for Global Finance Coalition.
IEO (2008). Governance of the IMF: An Evaluation. Washington DC: Independent Evaluation Office
of the IMF
King, M., 2006. Reform of the International Monetary Fund. Speech by Mervyn King, Governor of the Bank of England, at the Indian Council Research on International Economic relations (IcrIEr). New Delhi. February 20



[i] Truman, E. M., 2009. IMF Reform: An Unfinished Agenda. 28 January. Vox Eu.org. http://www.voxeu.org/index.php?q=node/2896.

[ii] Similar considerations will have to be made for the World Bank on the front of international development cooperation. But this will require a separate reflection.
[iii] See references reported in my commentary The IMF, the U.S. Subprime Crisis, and Global Financial Governance. VoxEu.org. February 3. http://www.voxeu.org/index.php?q=node/2973. The studies contributed to IEO (2008).
[iv] In this regards, the High-Level Panel on IMF Board Accountability (2007) provides important recommendations.
[v]See again the High-Level Panel on IMF Board Accountability, cit.