Rethinking Bretton Woods | Thu, Feb 8, 2007
The establishment of a “new procedure” for carrying out multilateral surveillance was a key pillar in the Medium Term Strategy promoted by Managing Director, Mr. Rodrigo de Rato. Almost one year since the International Monetary and Financial Committee (the policy-making committee of the IMF Board), endorsed “multilateral consultations”, claims that they would bring the IMF back from irrelevance sound less convincing.
The IMF's ""multilateral consultations"": were the skeptics right?
The establishment of a "new procedure" or carrying out multilateral surveillance was a key pillar in the Medium Term Strategy promoted by Managing Director, Mr. Rodrigo de Rato. Almost one year since the International Monetary and Financial Committee (the policy-making committee of the IMF Board), endorsed "multilateral consultations", claims that they would bring the IMF back from irrelevance sound less convincing.
The International Monetary Fund was founded with two main missions: the provision of financing for short-term balance of payments problems and maintaining a system of stable exchange rates (in the Bretton Woods system, these were fixed exchange rates).
As for the first mission, throughout the last few years the low use of the Fund facilities became increasingly evident. The demise of the Contingent Credit Line and the near-demise of the Compensatory Financing Facility, attest to this point. It is no secret that this first mission was made largely irrelevant with the stream of early repayments registered in the last year. Of course, early repayments are made possible because of a round of large current account surpluses in major borrowers and benign access to alternative sources of financing in the international capital market. But in the immediate aftermath of those repayments the IMF has come to be in the paradoxical situation of being worried about how to meet its own budget.
The second main mission was, in its pure form, lost after the fall of the Bretton Woods par value system, but it had remained, in some form, as the justification for the continued surveillance over member countries. The deepening of the global imbalances, at whose heart are the trade deficit of the US and the trade surplus of China, have increased the chances of a sudden disruption in the exchange rates. So the role of the IMF as the guardian of exchange rate stability is very much in doubt.
In this context, it is not by chance that the Fund emphasizes this aspect in its Medium Term Strategy. The Strategy, Mr. De Rato's attempt to give a new direction to the Fund "in light of the economic transformation brought by 21st century globalization", attaches first priority to what it called "multilateral consultations procedure." The procedure allows the Fund to take up issues "collectively with systemically important members." The consultations were presented as a way to address the linkages and spillovers of the macroeconomic situation of such systemically important countries in the world. Shortly thereafter the Fund announced that the first topic for such consultations would be the roots of global imbalances, their spillover effects, and how to promote their orderly unwinding. This set of consultations initially involved China, the United States, the Euro-area, Japan and Saudi Arabia.
The "new" function endorsed by the IMFC has been met with different reactions. The optimistic camp saw IMFC's endorsement as reason to salute a new era where Fund powers to deal with global imbalances had been strengthened. Some even saw the renaissance of multilateralism in the approach to solving problems of exchange rate coordination.
Those in the skeptical camp thought there were reasons to feel exactly the opposite. They brought attention to the fact that the IMF has had the function of examining the "spillover" effects of exchange rate policies in other member countries for a long time and, in fact, it had been using it. The portion of Article IV consultations dealing with spillover effects were typically a matter for discussion by the full Board, alongside the rest of the Article IV consultation reports. There was little in this process, already existing and in application, different from the "multilateral consultations" being hailed as a main pillar of the Funds' Medium Term Strategy. And, if this tool had been available and it had not had any visible impact on the global imbalances before, why could it be expected to achieve that purpose now?
Against this backdrop, a different and more unsettling interpretation of the IMFC language could be made. Indeed, the language could not be seen as an expression of renewed awareness among IMF member countries about the dangers posed by the lack of coordination of exchange rates. On the contrary, the language could be interpreted as a clear lack of will of IMF members to strengthen the institution or to provide it with adequate tools to do a job that was, formally, being deemed necessary. Seen in this new light, the IMFC resolution represented merely an attempt to dress as reinvigorated faith in multilateral solutions what was a continuing, and deepening, distrust towards the institution. This was all the most disturbing because it confirmed suspicions that the distrust was coming from even the IMF most powerful members. It was also disturbing because it came in the context in which the catastrophic magnitude of the threat was clearly not lost on anyone.
One year later, the evidence is on the side of the skeptics' camp. As multilateral consultations on global imbalances draw to an end, the IMF Managing Director's latest statements seem to suggest that all that can be expected as a result will be an "informal stocktaking exercise." In the meantime, the problem has hardly registered improvements. The US deficit with China was estimated at a staggering $ 214 bn. last November. The Chinese remninbi has revalued by 6 percent over the year and a half since the Chinese government decided to let it revalue (a decision made before these multilateral consultations started). One would be forgiven to think that there are no traces of IMF action in such change.
This is hardly a scenario to back up the claims of the optimistic camp. Quietly folded in the bureaucratic language of the last Managing Director's report, the silent death of multilateral consultations might well signify the failure of the IMF's last attempt to regain its lost relevance.