Brookings: Topics - Multilateral Development Organizations

The Group of Twenty: Origins, Prospects and Challenges for Global Governance

Homi Kharas and Domenico Lombardi — Thu, 02 Aug 2012 00:00:00 -0400

At the height of the global financial and economic crisis of 2008–09, the Group of Twenty was elevated to country leaders’ level and acknowledged itself as the “premier forum for ... international economic cooperation.”

This self-acknowledgment reflected the long-felt need to institutionalize the dialogue between the advanced and emerging economies in a more effective setting. However, the ad hoc nature of the G-20 and the extent to which an informal and self-selected club of nations can provide a stable framework for facilitating global cooperation has been questioned.

Against this backdrop, the study traces the G-20’s historical evolution, situates the dynamics of its institutional arrangements, and reviews the emerging literature on G-20 reform. Building on this analysis, the study then assesses the expansion of the G-20’s scope to global development and appraises the Group’s evolution in the broader context of the current global governance framework.

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Image Source: © Jason Reed / Reuters

Asia and Policymaking for the Global Economy

Domenico Lombardi, Kemal Derviş and Masahiro Kawai, eds. — Fri, 15 Apr 2011 00:00:00 -0400

Brookings Institution Press and Asian Development Bank 2011 200pp.

In this collaboration between the Brookings Institution and the Asian Development Bank Institute, eminent international economists examine the increased influence of Asian nations in the governance of global economic affairs, from the changing role of the G-20 to the reform of multilateral organizations such as the International Monetary Fund.

Established in the aftermath of the Asian financial crisis at the ministerial level, the G-20 has served as a high-level platform for discussing economic analyses and policy responses since 1999. During the current global financial crisis, however, the G-20’s role moved toward that of a global crisis management committee at the leadership level. The challenge now for the G-20 is to succeed in fostering ongoing and increasing cooperation among its members while being supportive of, rather than trying to replace, more universal institutions.

After analyzing the dynamics of growth in Asia comparatively and historically, the volume appraises the scope for policy coordination among key economies. The contributors analyze financial stability in emerging Asia and then assess the implications of Asia’s increasing role within the newly emerging system of global economic governance, focusing especially on reform of the international monetary structure.

Contributors: Dony Alex (ICRIER, New Delhi), Kemal Dervis¸ (Brookings), Hasan Ersel (Sabanci University), Karim Foda (Brookings), Yiping Huang (Peking University), Masahiro Kawai (ADBI), Rajiv Kumar (FICCI, New Delhi), Domenico Lombardi (Oxford University and Brookings), José Antonio Ocampo (Columbia University), Jim O’Neill (Goldman Sachs)

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ABOUT THE EDITORS

Domenico Lombardi

Kemal Derviş

Masahiro Kawai

Masahiro Kawai is dean and CEO of the Asian Development Bank Institute. He has also been deputy vice minister of finance for international affairs in Japan and a professor at the University of Tokyo’s Institute of Social Science.

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Homi Kharas and Nancy Birdsall — Sat, 09 Oct 2010 13:45:00 -0400

Editor’s Note: This commentary was initially published by the GlobalPost on October 9, 2010.

As world financial leaders gather here for the annual meetings of the IMF and World Bank, they will discuss what to do about replenishing the coffers of the International Development Association (IDA) — the World Bank’s window for making grants and concessional credits to the poorest countries in the world.

The talks are likely to be tough-going for aid and IDA champions. Advanced countries are struggling with their own debt and fiscal problems and ongoing fears of a second dip into recession. Although aid is a tiny fraction of most rich countries’ budgets, it is subject to even worse political pressures than other discretionary spending.

Tough choices will be made. Donors are already squeezing their pledges to other multilateral funds — recent commitments to the concessional fund at the African Development Bank barely kept pace in real terms with the past, and the new replenishment of the Global Environmental Facility was less than half the original proposal.

What about the IDA? Short-changing the IDA would make no sense, according to independent evidence just published by the Center for Global Development. Our new research assessing the quality of aid from donor countries and aid agencies shows that the IDA, as well as a handful of other multilateral funds, spent aid money “smarter” than most bilateral funds, extracting far more value for money in building a more stable, safer and more prosperous global system.

We applaud countries like the United Kingdom that have promised to protect their aid budgets. But the tough reality is that at a time of huge fiscal deficits in advanced countries, it is unrealistic to expect the rich world to be much more generous.

The answer is to be smarter about aid, to increase its impact in terms of development and poverty reduction for each dollar spent.

Our assessment of the quality of official development assistance (QuODA) looks at how donor countries and aid agencies score on 30 indicators spanning four dimensions of aid quality: maximizing efficiency, fostering institutions, reducing the burden on recipient countries and transparency and learning. These dimensions were chosen based on academic research, the principles of aid effectiveness to which official donors have publicly and repeatedly committed, and the concerns expressed by aid recipient countries themselves.

The maximizing efficiency index gives points to those who give money to the poorest countries, to well-governed countries, and in ways — such as not tying their aid to their own suppliers and contractors — that ensure the most efficiency in terms of development projects and programs on the ground.

The fostering institutions index rewards those who link their aid with recipient country development plans and who support the implementation of the countries’ own priorities. It penalizes agencies that set up parallel systems instead of providing aid whenever possible through local institutions.

The reducing burden index recognizes that the current aid system has significant waste and overlap. Many of the 152 agencies we track give aid in small packets. The median size of projects has been falling steadily and is now just $70,000, too tiny to generate scale economies. With more than 80,000 small, new projects annually, each with its own reporting and monitoring requirements, negotiating and reporting has become an enormous burden on recipients. In our index, we reward donors who minimize this administrative burden.

The transparency and learning index reflects the importance of providing timely, comparable information on who is doing what where. Without such information, there can be no coordination among donors and no learning from experience. Development assistance has yet to take advantage of the potential offered by modern information technology, such as geo-coding and real-time client feedback.

Multilateral agencies, on average, do better than bilateral agencies on three of the four indices, the exception being transparency. IDA is the only large agency that appears in the top 10 across all four indices. It does especially well in fostering institutions and in transparency and learning. Indeed, the IDA implemented a far-reaching transparency program last July and has just made all its development statistics and most internal material freely available on the web.

The conclusion from QuODA is straightforward. In these difficult fiscal times, donors should put a premium on value for their development funds. They can best do this by channeling more resources through multilateral agencies. The leader among those agencies is IDA. Concluding a generous IDA replenishment, through a reorientation of development budgets if necessary, would be a smart and thrifty move.

Authors

Homi Kharas
Nancy Birdsall

Publication: GlobalPost

Reform of the Multilateral Development System: Call for a High-Level Commission

Johannes F. Linn — Fri, 08 Oct 2010 13:21:00 -0400

At this weekend’s annual meetings of the International Monetary Fund and the World Bank, and at the upcoming G-20 Summit in November, there will be a lot of discussion on how to reform the governance, operations and funding of these two multilateral development institutions. However, the problems of the IMF and World Bank are only a fraction of the much larger challenge facing the international community.

The multilateral development system is broken. According to estimates from the OECD-DAC, the number of multilateral agencies engaged in providing development support increased from 30 in 1950 to 196 in 1980 and further to 263 in 2008. However, in terms of financial flows of official development assistance (ODA), multilateral development assistance has lost ground relative to bilateral aid flows over the last 30 years. And among multilateral aid agencies, the traditional leaders—the World Bank’s International Development Association (IDA) and the United Nations and its agencies—have faced a reduced share. At the time of its creation in 1960, IDA was the only multilateral soft-loan window. It was set up to bundle the resource flows to poor countries, reaping the benefits of scale, concentration and burden sharing. Today, IDA’s share in multilateral concessional resource flows is below 25 percent and its share in total concessional official aid recorded by the OECD-DAC is only about 5 percent.

While clearly there are benefits from having new donors on the scene—in particular, more money and new ideas—there are also serious drawbacks when a large number of donors crowd in on the limited absorptive capacity of poor recipient countries. Lack of coordination, high transactions costs, and a jungle of different fiduciary and safeguard (environmental, social and legal) requirements contribute to the ineffectiveness of aid flows.

This issue was recognized some years ago by the Paris Declaration on Aid Effectiveness, under which donor and recipient countries committed themselves to improve the effectiveness of aid through pursuit of five principles: ownership, alignment, harmonization, results and mutual accountability. However, implementation of this agenda has turned out to be difficult, especially in regards to effective in-country coordination. In the absence of a transparent and accepted leadership, by either the recipient government or a lead donor, there remains the key issue of how to overcome the coordination challenges that donors face on the ground. In the past, the World Bank, and to a lesser degree the United Nations Development Programme (UNDP), played the lead role in aid coordination in the absence of a strong government capacity; but in recent years, these two institutions have played the leadership role less and less, reflecting their declining roles as key players in the evolving aid architecture.

Of particular concern over the last decade has been the creation of many specialized multilateral funding windows. They have been effective in pursuing a strong results orientation and scaling up of interventions in narrow areas of their mandates, especially in the health sector. They therefore have proven to be attractive to donors. But they also have added a new dimension to the fragmentation process. The global (or “vertical”) funds, with their application of overwhelming financial resources and strong advocacy, have been accused of biasing recipient governments’ priorities in the direction of the particular fund’s objective. Scarce national resources, both financial and managerial, are at risk of being diverted away from important systemic challenges as a result of the vertical funds’ high-powered intervention. Again, a key constraint in assuring a balanced approach toward global development challenges is the fact that the World Bank and UNDP, which have traditionally provided the resources for dealing with the “horizontal” or systemic issues, play a relatively much weaker role today than they did three or four decades ago.

With the current international focus on climate change, new vertical funding mechanisms are being set up, risking a repeat of the problems of vertical funds in the health sector. Especially in the area of funding the costs of adaptation to climate change, separate funding mechanisms would duplicate the capacity of the multilateral development banks (MDBs), in particular the World Bank, since interventions in support of adaptation are in many ways, if not all, identical to traditional development interventions, which traditionally have been the mandate of the MDBs.

But the problem is not only a matter of the rapidly rising number of multilateral agencies. The number of development projects funded by external official sources is on the rise, while their average size is on the decline. The median project size now falls well below $100,000. Multilateral donors follow the general trend, with a three-fold increase in the project numbers (from about 6,000 to about 18,000 over 10 years) and a precipitous drop in median project size. With a rising number of ever-smaller projects, the risks of aid fragmentation, a lack of focus on scaling up development impact, and rising transactions costs are reinforced.

Finally, the effectiveness and legitimacy of the traditional multilateral development organizations have been increasingly called into question. The complexity and costs of their operations have risen with increased burdens of fiduciary and environmental and social safeguard requirements; and their governance structures have not adapted to the rapidly changing global economic conditions.

The time has come for a fundamental reform of the multilateral development architecture. The only international body which can credibly take on this task is the G-20. Therefore the G-20 should set up a high-level commission to review the existing framework of multilateral development institutions and prepare recommendations for their reform. Such a commission would, inter alia, address the following questions:

1. What should be the mandate for multilateral development agencies?
2. What is the appropriate division of labor and resources between multilateral and bilateral aid, and among multilateral agencies?
3. Should existing multilateral organizations be consolidated and/or a moratorium be placed on the creation of new multilateral agencies?
4. What are the right principles for the governance of multilateral agencies that will help ensure their legitimacy in terms of representativeness, effectiveness and accountability?
5. How can the processes and procedures of the multilateral agencies be streamlined and harmonized to minimize their administrative costs and the burdens placed on recipient countries?

Authors

Johannes F. Linn

Image Source: Simone D. McCourtie

Toward the Consolidation of G-20 Summits: From Crisis Committee to Global Steering Committee

Mon, 27 Sep 2010 19:00:00 -0400

Event Information

September 27-29, 2010

(see agenda)
COEX

Seoul, Republic of Korea

Two challenges that could threaten the credibility and sustainability of the G-20, and its potential as an enduring global leadership forum into the future, are:

1. The growing intensity of political polarization and anxiety among ordinary citizens.

2. The unclear willingness of governments of major economies to agree on a long-term roadmap of collectively consistent and mutually reinforcing polices that provide a feasible pathway for global recovery.

The G-20 Seoul International Symposium held in late September 2010, organized by the Brookings Institution and the Korea Development Institute (KDI), anticipated these threats. Global rebalancing is seen to be a daunting political challenge for the sovereignty of nations, an institutional problem for the effectiveness of multilateral surveillance and a difficult economic policy issue. And an entire segment of the conference was devoted to public attitudes in G-20 countries (Bruce Stokes, National Journal), domestic leadership in a polarized and globalized world (Thomas Mann, Brookings), and leadership, publics and communications (Wendy Sherman, Albright Stonebridge Group), with prominent journalists (Alan Beattie, Financial Times, and Paul Blustein, formerly with the Washington Post) contributing to the discussion.

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An Unexpected Agenda Item at the Next IMF Annual Meetings

Domenico Lombardi — Tue, 07 Sep 2010 10:39:00 -0400

It’s no secret that IMF reform has been slow since the jump-start it got at the Pittsburgh G-20 Summit last year, where after some arm-twisting President Obama managed to get a promise from his fellow leaders to reallocate “at least 5 percent” of the IMF’s voting rights to under-represented member countries, which are broadly understood to be emerging-market and developing economies.

The latest development on the reform front, as reported by Reuters, is that the U.S. will veto the approval of a special resolution at the next IMF Board of Governors meeting in October. This veto could have wide-ranging implications well beyond those of any recent quota review and bring about outcomes that we haven’t seen in a generation, albeit with significant risks.

The Issue

The resolution at stake would allow the main IMF policymaking body, its executive board, to operate at its current size (24 executive directors plus a chairman). However, the IMF charter only allows for 20 directors and straying from this provision requires approval by the board of governors of a special resolution every two years, with a supermajority of 85 percent of the overall voting power. This, in practice, puts the U.S. in the unique position to effectively exercise a veto given that its voting rights are 16.74 percent of the total.

The move to veto reflects three major concerns of the U.S. administration:

The frustration at the slow progress in IMF governance reform, stalled mainly by underground European opposition.
The White House objective to make emerging-market economies responsible stakeholders in the international monetary system with both rights and due accountability.
The awareness that quota reallocations, though important, can exert limited impact on the IMF’s own decision-making if the issue of who sits in its boardroom is not addressed.

Fanning the flames of these long-time concerns was Europe’s stance at the June G-20 Summit in Toronto, when European leaders snubbed repeated U.S. calls for their countries to assume a fair share of the burden of sustaining the global recovery, as allowed, of course, by their respective macroeconomic conditions.

In fact, it is the Europeans that the U.S. is trying to target with the veto. For historical reasons, Europe has enjoyed the privilege of a sizable representation in the IMF’s most important hall. Depending on the rotational pattern of each chair, there are times when as many as eight European representatives sit on the executive board, 10 if we include representatives from Switzerland and Russia.

The Prospect

Any plan to consolidate European representation in the short-term is practically unworkable. Even if (and this is a big “if”) the Europeans were willing to pool their representation, this would inevitably mean drawing Germany, France and the U.K. into multi-country constituencies. The problem with that is these three countries are, by the stipulations of the IMF’s own charter, intended to occupy single chairs. Changing their status is feasible, but it would require amending the charter, which is not something that can be done overnight.

Because the U.S. move is mainly driven by their desire to shake things up, the impasse may be surmounted if at the October annual meetings the Europeans were willing to state—for the record—their pledge to pool their representation by the time of the next general elections in 2012, devise a binding roadmap and provide operational details as to how to achieve their target. Incidentally, this would have the benefit of reallocating country representation on the basis of revised quotas, as currently being negotiated, which would provide a stronger sense of legitimacy to the whole exercise.

There are a couple of solutions at hand. In the most recent consultations with global civil society, called for by the IMF’s managing director, a proposal was put forward in the final “Fourth Pillar” Report, and backed by several academics and civil society actors, to pool E.U. representation into two chairs: one representing euro area members, the other representing E.U. countries that do not belong to the European monetary union. This approach would leave enough room for a couple more chairs including other (non-E.U.) European countries, such as Switzerland, or rising economies, such as Turkey and some Eastern European nations. Alternatively and more realistically, euro area countries could cluster their representation around the three hubs of the largest euro-area economies (i.e. Germany, France and Italy) and then one or two more chairs would include other European countries.

But these options trigger other questions: if Germany and France end up in multi-country constituencies, the position of Saudi Arabia or Russia as single-country chairs becomes increasingly untenable.

The Risk

A “forced” consolidation of European representation through a U.S. veto is not without risk. The most immediate is the disruption of the ordinary governance of the institution. In a sense, this has already come to pass as general elections for executive directors, which should have been more or less finalized by now, have been put on hold. Should European governments fail to arrive at a constructive position on this issue, the IMF will be forced to extend the term of the current board due to expire on October 31. This would pose further legitimacy problems for an institution struggling to find a more representative and legitimate role in the changing world order.

Obviously, there is nothing to prevent the calling of a general election now. However, lacking any agreement among Europeans, then four board members will have to go. These will likely be those representing chairs with the lowest voting power, such as the twenty-three-member Rwandan, the six-member Argentinean, the four-member Indian and the nine-member Brazilian constituencies. As a result, important emerging-market countries and a dense group of low-income countries would lose their voice in the IMF’s policymaking room, which is exactly the opposite of what the U.S. has in mind by resorting to the veto.

The stakes are high any way you look at it. Though, European inaction could ratchet them up even further, putting in jeopardy the role of the IMF itself in the global community.

Authors

Domenico Lombardi

Emerging Markets Need a Credible Global Crisis Insurance System

Eswar Prasad — Sun, 25 Jul 2010 00:00:00 -0400

With their strong growth prospects, emerging markets are once again becoming the darlings of international investors in search of decent yields. This will lead to even more capital flowing towards these economies, exposing them to the fickleness of these flows. Capital accounts of emerging markets, even those that ostensibly have capital controls, are becoming increasingly open in de facto terms, making it difficult to stanch these inflows.

Naturally, emerging markets want to protect themselves against volatile capital flows and reduce their vulnerability to balance of payments crises resulting from sudden stops or reversals of capital inflows, which have burnt many of them in the past. Building up reserves is one solution.

Do emerging markets need such large and expanding hoards of reserves? The crisis has in fact accentuated the incentives for reserve accumulation. First, during the crisis, reserve levels that were regarded as very high relative to traditional benchmarks such as imports and external debt didn't seem to make economies bullet-proof. Countries like India and Russia lost about a fifth of their reserves in just a few months. Second, the resources of international financial institutions like the IMF were clearly not sufficient to support the major emerging markets if they all came under pressure at once. Even with the increase in the IMF's financial resources sanctioned by the G-20, self-insurance still seems like a reasonable approach as the IMF may run out of money if another global crisis were to come along. Third, the leveraging effect of IMF loans disappeared during the crisis. In the past, accepting policy conditions attached to IMF loans would bring in private capital. That did not happen during the crisis, when there was a worldwide credit crunch.

Of course, it is inefficient and costly for emerging markets to self-insure by accumulating reserves. But they do not see any good alternatives. Regional insurance mechanisms are unlikely to be of much use as many shocks tend to be regional in nature, affecting many countries in the region at the same time. An international insurance mechanism through an institution like the IMF would be the obvious answer. However, any association with the IMF remains toxic for political leaders in emerging markets, especially those in Asia. The IMF also lacks legitimacy in the eyes of emerging markets as voting shares at the institution are heavily tilted towards advanced economies and reforms to give emerging markets more representation have been moving at a glacial pace.

What's the solution? I have proposed a global insurance scheme that would allow countries to directly purchase insurance against crises, removing the stigma of depending on an institution like the IMF to save them from crises [see this]. Such a scheme would allow countries to buy as much insurance as they wanted (with the premiums determined by the quality of their macroeconomic policies and the desired quantum of insurance), with no ex-post conditionality attached to the payouts.

The IMF can still play a useful role through other lending mechanisms; reforming the institution's governance structure would certainly make a difference in the level of trust that emerging markets have in the institution.

These steps would make a good start at reducing the need for self-insurance through reserve accumulation, which is costly for individual emerging markets and could perpetuate global imbalances—one factor that got us into this mess in the first place.

Authors

Eswar Prasad

Publication: The Economist

IMF and Asia: What's next after G20?

Domenico Lombardi — Thu, 24 Jun 2010 00:00:00 -0400

As the global economy recovers, at the head of the pack with stronger than anticipated growth are the “emerging” countries in Asia. These countries have managed to withstand tough global economic conditions that nearly led to depression elsewhere, thanks to their resilient aggregate demand, sound policy fundamentals, and swift reaction to the crisis.

Much has changed since the Asian financial crisis in the late 1990s, which was characterized by sharp contractions in economic activity and even some social and political turmoil. While the IMF intervened at the time, its programs were later found to be too limited in scope, excessive in their conditionality, and inadequately designed to address immediate challenges.

This time around, the IMF has acted more forcefully, with institutional vigor that it previously never displayed. Specifically, it has established a new facility — the Flexible Credit Line — which provides countries with a sound track record potentially unlimited access to Fund resources. It has also upgraded its lending framework and has promised to better safeguard its members’ interests. The IMF has become the central international organization providing high-level advice to the G20 leadership. Through critical analysis and recommendations, the IMF has served as the foundation for collaborative official actions essential for containing the potentially devastating effects of the recent crisis.

While the IMF’s new-and-improved responsiveness has appealed to several countries, almost no Asian nation has called on it for assistance. Singapore and Korea have preferred to seek support from the U.S. Federal Reserve in the form of bilateral currency swaps. In fact, Korea has proposed a new global swap regime that would allow countries to reduce their reliance on exports and thus reduce the need for precautionary reserves as well.

For their part, East Asian nations have launched the Chiang Mai Initiative Multilateralization — a $120 billion regional currency swap agreement between Korea, China, Japan and the 10 ASEAN members — which will establish an operational surveillance unit in Singapore by the spring of 2011. In other words, they have created an embryonic Asian Monetary Fund. The fact that the IMF is not more preeminent in Asia is symptomatic of regional preferences to pursue structural reforms of the international monetary system rather than incremental changes at the IMF’s institutional level.

Increasing financial openness in Asia has brought considerable advantages in terms of additional funding opportunities for local companies. But it has also created new sources of vulnerabilities due to the pro-cyclical nature of international capital flows and contagion from financial crises experienced in other, often neighboring, economies. Korea and other Asian countries experienced this firsthand in the late 1990s and since then have embarked on the large-scale accumulation of foreign reserve assets to use as a buffer against sudden stops in international capital flows. Yet, because such reserve assets are mainly denominated in U.S. dollars, euro or other national currencies, their external value is exposed to unilateral policy adjustments that the respective issuing countries may want or need to make. This risk would be considerably reduced if countries could hold larger quantities of Special Drawing Rights as foreign reserves. As “synthetic” reserve assets consisting of a basket of major world currencies, they are typically less volatile than any given reserve currency issued by a particular country or area.

Any attempt to strengthen the role of SDRs in the international monetary system should first reinforce the link between SDRs and their issuing institution, the IMF, which, by virtue of its global regulatory role, should control the provision of SDRs based on global liquidity needs. Although theoretically this appeals to many analysts, it is not currently politically feasible since it presupposes stronger global governance. At the moment, any decisions on the issuance of SDRs, including the recent allocations endorsed by the G20, are in the hands of member countries. Since some of them are reserve-issuers, they do not feel the urgency in moving forward this agenda.

Another needed structural reform is the establishment of a multilateral forum for global surveillance where advanced and “emerging” economies could examine mutual economic policy spillovers on an equal or peer basis. This is where the most progress has been witnessed over the past couple years with the establishment of the G20 leader summits as the premier forum for international economic cooperation. The fact that the G20 has been elevated to this status undoubtedly reflects the desire of the U.S. and others to integrate the world’s most dynamic economies into a global framework.

The forthcoming G20 summits in Toronto in June and in Seoul in November will feature a major discussion on the coordinated policy responses needed to put the global economy on a path toward “strong, sustainable and balanced growth.” What is historically significant with these forthcoming discussions is that they include all the systemically-important economies of the world, many of which are in Asia. Indeed, the very fact that these summits will unfold under the Korean chairmanship of the G20 is emblematic in itself.

However, the emergence of the G20 as the global surveillance forum competes directly with the IMF’s role as a forum for international monetary cooperation, which is set forth in the IMF charter. This leads to another much-needed structural reform in IMF governance. If the Fund hopes to boost its role in the international monetary system, it must modernize its governance and fill the void created by the current asymmetry between the role that rapidly-growing countries have in the world economy and the weight they are given in IMF decision-making, which still favors Europe and North America.

Since many Asian countries are underrepresented at the IMF and feel little ownership in the institution, they hesitate to submit their economic policies to IMF scrutiny. Should they find themselves in need of international liquidity buffers to counter potential sudden shifts in global capital flows, the state of affairs at the IMF may incentivize these countries to directly approach the issuer of the main reserve assets, or the U.S. Federal Reserve.

IMF reforms that represent enhancements at the institutional level but do not also take into account needed structural reforms of the international monetary system will not truly enhance the Fund’s position in Asia or improve its level of engagement in the region. Such reforms should hopefully feature on the agenda of world leaders soon.

Authors

Domenico Lombardi

Publication: The Korea Herald

Learning from the Global Economic Crisis: IDB and IMF Reports for Latin America

Thu, 17 Jun 2010 08:30:00 -0400

Event Information

June 17, 2010
8:30 AM - 10:30 AM EDT

Saul/Zilkha Rooms
The Brookings Institution
1775 Massachusetts Avenue, NW
Washington, DC 20036

In the aftermath of the most severe global crisis in recent times, Latin American and Caribbean nations have shown remarkable economic resilience, but it is time to take a closer look.

On June 17, the Latin America Initiative at Brookings welcomed experts from the Inter-American Development Bank (IDB) and International Monetary Fund (IMF) to examine the long-term outlook for the region in the context of the financial crisis, the recovery and challenges ahead. Two new reports spurred the discussion. Alejandro Izquierdo, principal economist of IDB’s research department, and Ernesto Talvi, executive director of the Center for the Study of Economic and Social Affairs, highlighted key findings from ”The Aftermath of the Crisis: Policy Lessons and Challenges Ahead for Latin America and the Caribbean.” Nicolás Eyzaguirre, director of the Western Hemisphere at the IMF, and Steve Phillips, chief of the Regional Studies Division at the IMF, discussed the IMF’s Regional Economic Outlook: “Taking Advantage of Tailwinds.”

Guillermo Calvo, professor of economics, international and public affairs at Columbia University; Nancy Lee, deputy assistant secretary for the Western Hemisphere, Office of International Affairs at the U.S. Department of Treasury; and Brookings Senior Fellow Mauricio Cárdenas, director of the Latin America Initiative, discussed the report’s findings based on regional perspectives. Brookings Senior Fellow Carol Graham moderated the discussion.

Audio

Learning from the Global Economic Crisis: IDB and IMF Reports for Latin America

Transcript

Transcript (.pdf)

Event Materials

Participants

Moderator

Panelists

Alejandro Izquierdo

Principal Economist, Research Department
Inter-American Development Bank

Ernesto Talvi

Executive Director
Center for the Study of Economic and Social Affairs

Nicolás Eyzaguirre

Director, Western Hemisphere Department
International Monetary Fund

Steve Phillips

Chief of the Regional Studies Division
International Monetary Fund

Guillermo Calvo

Professor of Economics, International and Public Affairs
Director of the Program in Economic Policy Management
Columbia University

Nancy Lee

Deputy Assistant Secretary for the Western Hemisphere, Office of International Affairs
U.S. Department of Treasury

What Is the Next Sick Economy of Europe?

Domenico Lombardi — Thu, 27 May 2010 00:00:00 -0400

Editor's Note: Attention has shifted from the financial troubles in Greece to other troubled euro zone countries. In an interivew with PBS NewsHour, Domenico Lombardi discusses which European countries are in the worse shape and what this means for the global economy.

Can you walk us through the situations of those various states in most trouble? Italy, Spain, Portugal, Ireland, even Britain?

Domenico Lombardi: The crisis in Europe is no longer confined to Greece. What was originally a budget crisis in a relatively small economy of the euro area has become a systemic crisis involving the whole euro area. In particular, Portugal, Spain, Italy and Ireland are all affected by potential contagion.

Clearly the issues are a little bit different because in Spain the problem is mainly an unsustainable debt born by the private sector, while in Greece [it] is more an unsustainable debt born by the public sector.

In Italy, it is mainly an issue with the public sector and also the inability of the Italian economy to generate enough growth to serve this increasing pile of debt. However, what is really linking all these countries is that because the Europeans did not act timely in containing the spillovers of the Greece crisis, now essentially this crisis has spread to the other countries of the euro area and assumed really systemic proportions.

Several of these countries have proposed austerity measures. Do they go far enough? Are they realistic or even politically feasible?

Lombardi: Many countries that may be hit by the crisis -- like Italy, Portugal, Spain -- have adopted or are implementing additional budget measures. This is an important measure, especially in the short-run, because they need to cut down their budget deficits and they need to improve their fiscal position.

However, as important as these measures may be, they are not enough by themselves, because what financial markets are really wondering is to what extent these countries will be able to grow at such a rate that they will be able to serve an increasing pile of debt. This is really the key issue.

Just to make an example, the U.S. and Greece were running the same budget deficit in comparison to their own GDP last year, and yet no one even for one minute would doubt that the U.S. could find itself in the same situation as Greece for many reasons, one being that the U.S. economy is a very vibrant one, has a high potential rate of growth and therefore it is better able to handle an increasing pile of public debt. This is really what European economies lack at the moment -- a high potential growth that would help them to stabilize the increasing public debt.

Read the entire interivew »

Authors

Domenico Lombardi

Publication: PBS NewsHour

Why the Greek Debt Crisis is a Problem for the Entire World Economy

Eswar Prasad — Mon, 24 May 2010 00:00:00 -0400

This note briefly traces out the implications of the Greek debt crisis (and bail-out) for different regions of the world.

Greece and the PIIGS: Greece has been given about a year to set its house in order. It is unlikely that Greece can actually accomplish the onerous conditions imposed under the IMF programme—the real question is whether there will be measurable progress towards those goals, including a reduction in the budget deficit and reforms to labour and product markets.

If there is progress, the EU and IMF could continue to support Greece after a year and help work out an orderly restructuring of Greek debt. This would be less painful for Greece and limit contagion effects. If Greece shows little progress, then we will have a messy restructuring, with much greater potential of regional contagion.

In either event, this sovereign debt crisis is going to increase the level of unease about rapidly rising debt levels in other advanced economies. Down the road, this could foster further instability in world financial markets.

Europe: The long-term viability of the euro project is going to be under the spotlight and in the future investors are going to discriminate more carefully amongst bonds issued by different countries in the euro zone. This crisis has exposed a fundamental structural problem—divergent productivity growth across the eurozone economies and the lack of an effective enforcement mechanism for fiscal discipline, obviously complicated by the absence of an intra-zone monetary policy adjustment mechanism.

The possible solutions are (i) a drastic restructuring of the economies on the periphery in order to boost their competitiveness or (ii) rising transfers from the core to the periphery. It is not obvious that Europe has the political will for either solution, but the costs of the euro project are going to become increasingly apparent and bring matters to a head.

China: The debt crisis will hurt short-term growth prospects of European Union countries and keep the euro weak relative to the dollar, creating a double hit on prospects for China's exports to its most important foreign market. This is likely to delay a move on the renminbi, especially if ripple effects of the European crisis lead to a further strengthening of the dollar—and, by extension, the renminbi—due to the safe-haven effect These developments have fortified the hands of those officials in China who are stoutly opposed to renminbi appreciation for fear that it could dampen export and employment growth.

Other emerging markets: Once the initial wave of panic related to the Greek debt crisis passes, and with continued low interest rates in advanced economies, emerging markets with good growth prospects could face another surge in capital inflows. With stunted growth in their advanced country export markets and rising exchange rates, their industrial sectors could come under sharp pressure. Chinese currency policy will of course make matters worse as it will lead to more inflows into some of these economies (especially Asian emerging markets) as a proxy play on the renminbi and further worsen their external competitiveness position.

Global economic recovery: The turmoil in world currency and financial markets and a weakening of one of the key economic regions in the world could drag down global growth. The best-case scenario is that Europe won't be a drag on growth in 2010-11. It is difficult to envision the region making a significant positive contribution to world economic growth over this period. The US goal of doubling exports in the next five years is going to be greatly hindered by the dollar strength and weaker import demand from Europe, which is itself going to be looking to exports to pull itself out of the slump.

International monetary system: Governance reform at the IMF to give the emerging markets a more appropriate level of presentation, which is already moving along at just a glacial pace, could grind to a halt. The crisis has exposed deep fractures within Europe and the prospects of European countries coming together to consolidate their voting shares at the IMF now seems more remote than ever.

In short, the Greek debt crisis and its ripple effects are bad news for all corners of the world and there is a strong collective interest in containing the problem. The risk is that a weak containment strategy limits the immediate damage but leaves the underlying problems festering and creates bigger problems in the future.

Authors

Eswar Prasad

Publication: The Economist – Free Exchange

The European Rescue Plan: Opportunities and Limitations

Domenico Lombardi — Thu, 13 May 2010 09:21:00 -0400

Editor’s Note: In response to the European rescue package recently announced by the European Union and the International Monetary Fund, Domenico Lombardi analyzes whether the plan can stabilize the euro, the future of the European monetary union and the implications for the U.S. and global economy.

While the European Union emergency plan led to an immediate gain in stocks, will the plan succeed in the long run? What additional action can the EU and its member states take to regain financial stability?

Shortly after the announcement of a European emergency fund to stabilize the euro-area economy, gains were seen in the financial markets. The European Stabilization Mechanism (ESM) may throw up to $1 trillion (or EUR 720 billion, including some EUR 220 billion to be provided by the IMF on a country-by-country basis) at the euro-area economies. But within hours, the euro exchange rate with the dollar soon dropped back to its pre-announcement levels.

Two factors may explain this lukewarm reaction. First, the bulk of the money promised by the euro-area countries is not there yet. In fact, euro countries will be providing guarantees that will enable the ESM to borrow from the financial markets and then lend to countries in need. How these funds will be disbursed, and under what decision-making mechanism, is not yet known. Can they be used to fund precautionary arrangements as a preemptive strike? Or will the requesting countries need to show they have no alternative, as was the case with Greece? Will the disbursements require the unanimous consent of all 16 euro-area countries? Markets are eager to know.

Secondly, there is widespread understanding that the ESM is more of a cure for the symptom rather than the cause. Countries in financial difficulty will be offered further debt to tackle an already unsustainable pile of debt. It is true that some euro-area countries are frontloading their fiscal adjustment but what market participants would like to see is a far-ranging, sustainable plan that would foster the growth potential of the euro area in the long run, rather than just an increase in the fiscal pressure, which will further cripple their growth prospects.

Is greater political and economic integration needed for the euro area to function under one monetary unit?

The basic principle that has underpinned, in practice, the policymaking within the eurozone is that it is sufficient to delegate the conduct of the monetary policy to an independent central bank, rather than harmonize the full spectrum of economic policies beyond the European Central Bank (ECB)-run monetary policy. The European monetary union cannot run on automatic pilot based in Frankfurt. It needs to be underpinned by a common policymaking framework and a constantly-renewed political commitment to this historical achievement.

The policymaking framework has increasingly weakened as countries have been running unsustainable fiscal and financial policies that the recent international crisis has definitely highlighted. Instead of pursuing medium-term growth plans consistent with economic stability, the euro area policymaking was being anchored to the thresholds indicated by the Maastricht Treaty. What was meant to be a set of criteria to benchmark the stability of the euro-area economy has inappropriately become the comprehensive anchor of the entire euro-area policymaking. Despite that, countries have deliberately and continuously broken those rules that they had created for themselves. No wonder that the IMF has been called in to underpin the credibility of the ESM.

What are the immediate and long-term implications on the United States and global economies?

The White House has had several calls with its counterparts in Europe in the recent weeks; and the U.S. Federal Reserve has started to lend large amounts of dollars again to various central banks, including the ECB, in an attempt to ease liquidity in the markets.

For the U.S. economy, the consequences may be more relevant than commonly assumed: Europe is its most important trading partner and the U.S. needs to export more to this area to increase job creation and consolidate the recovery. Moreover, as the euro may remain weak in the near future, this will increase the competitiveness of European exports to the international markets in which Europeans compete with American manufacturers.

Authors

Domenico Lombardi

Consultation with Critical Perspectives from Scholars on the World Bank’s New Education Strategy

Thu, 13 May 2010 12:00:00 -0400

Event Information

May 13, 2010
12:00 PM - 3:00 PM EDT

The Brookings Institution
1775 Massachusetts Ave., NW
Washington, DC

On May 13, the Center for Universal Education at Brookings hosted an expert academic consultation on the development of the World Bank Group's new Education Strategy (2010-2020). The consultative meeting brought together a small group of progressive critical thinkers from academia and the global education advocacy community. The purpose of the discussion was to gather input and suggestions aimed at strengthening the World Bank Group's work in the education sector.

Elizabeth King, Director of Education at the World Bank, provided an overview of the changes the Bank has witnessed in the last decade that affect the future of education, such as increased concern about youth unemployment and increasing demand from governments to equip youth with the skills valued by the local and global labor markets; greater globalization; the rapid expansion of ICT in schools and the marketplace; and progress on the Millennium Development Goals. She noted that the Bank’s new education strategy would address the needs of the world’s poorest in this changing context in order to help move them out of poverty.

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Event Materials

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Sri Mulyani: Indonesia's Loss, the World's Gain

Lex Rieffel — Thu, 13 May 2010 16:07:00 -0400

In the world’s leading countries, such as the members of the Group of Twenty (G-20), the two most coveted positions in the cabinet are generally the foreign minister and the finance minister. And the record is quite clear: an outstanding finance minister or foreign minister can be an enormous asset, especially in times of financial or political stress. He or she can even outshine a head-of-state.

Since 2005, Indonesia has benefited from having an outstanding finance minister, Sri Mulyani Indrawati. For the past five years she has waged a lonely battle to overcome the deeply-rooted patronage culture within the Indonesian bureaucracy, which is one of the main obstacles to economic progress in this important country (the fourth largest in the world, with a population of 240 million). On May 5, President Susilo Bambang Yudhyono (known as SBY) announced that Sri Mulyani was resigning from the cabinet to take up a new job in early June as one of the World Bank’s three managing directors (reporting directly to World Bank President Robert Zoellick).

Sri Mulyani’s battle has been lonely for three reasons. First, very few other cabinet members have pursued bureaucratic reform with the intensity and skill she has exhibited repeatedly. Second, she is a technocrat with no natural political party support, especially in the parliament (DPR), which is another enormous obstacle to reform in this 12 year old democracy. Third, her two main sources of support for the past five years—President SBY and Vice President Boediono—have been put on the defensive by a powerful coalition of ambitious politicians and business executives.

The story in brief is a tragedy. From 2002 to 2004, Sri Mulyani served as an executive director in the International Monetary Fund, representing most of the Southeast Asian nations. Her experience at the IMF enabled her to be an effective finance minister and become highly regarded both among her counterparts in the public sector and by the global financial industry.

Ironically, because of mistakes made by the IMF in supporting Indonesia during the financial crisis it experienced in 1997, Sri Mulyani’s time at the IMF is widely viewed by Indonesians as a liability instead of an asset. The architects of Indonesia’s remarkable transition from 30 years of authoritarian rule by Soeharto to the vibrant democracy that exists today have tried to build popular support for her. But they have been outgunned and outmaneuvered by vested interests that have portrayed her as being unsympathetic to Indonesian values.

Financial markets, as would be expected, reacted negatively to the immediate news of Sri Mulyani’s departure, but were able to regain initial losses within a week. President SBY has not yet announced her replacement, and it will be hard to find one with comparable skills and grit. More disturbing is the possibility that the anti-reform coalition—that has hounded Sri Mulyani for more than two years—would block such an appointment. Without a finance minister committed to tackling corruption and other symptoms of weak governance, President SBY and Vice President Boediono could be powerless to stop the country from drifting toward the kind of massive self-dealing that brought down the Soeharto regime in 1998, despite their good intentions and remaining personally untainted by corruption.

Another spin on Sri Mulyani’s move, however, has been almost completely ignored. The job of finance minister in Indonesia is physically and emotionally overwhelming. How could she not be burned out after five years of internal battles and external crises? How could she justify the toll of another year or more on her family?

Indonesia’s loss is the World Bank’s gain. Or maybe it’s the world’s gain because the new position in the World Bank could be a stepping-stone to a more responsible position in the international financial community. And one day, after she has had a chance to re-charge her batteries, her fellow countrymen and women might decide that they need her talent and energy to break the shackles of patronage and help Indonesia achieve the goal of being a just and prosperous society.

Authors

Lex Rieffel

Image Source: © Mick Tsikas / Reuters

Taking Stock of the IMF and World Bank Spring Meetings: G-20 Here to Stay?

Domenico Lombardi — Fri, 30 Apr 2010 16:13:00 -0400

The recent IMF and World Bank spring meetings have confirmed the upgrading of the G-20 to the premier forum for global cooperation. In contrast to the flamboyant meetings of the past, the G-7 held only a very discreet dinner that went almost unnoticed. So let’s examine the main issues that were discussed at the meetings last weekend and developments of this past week.

The G-20

At a full-day meeting last Friday, G-20 finance ministers began the initial phase of their adopted mutual assessment process by looking into the implications of their respective national policy frameworks. The discussion was mainly interlocutory and aimed at preparing the groundwork for the G-20 summit in Toronto in June, when leaders will be considering a starter set of policy options to implement.

This is the first multilateral exercise conducted on a global scale; one that includes the IMF as a trusted and strategic advisor but that, de jure and de facto, falls outside of the IMF’s own statutory framework. Not surprisingly, there were attempts to build a bridge between the IMF’s own ministerial committee (IMFC) and the G-20 through some ad hoc joint meetings on Friday and Saturday.

This has prompted some observers to propose the creation of a new IMF decision-making ministerial committee made up of the G-20 finance ministers. This would have the advantage of adding a constituency-based dimension to the G-20, thereby increasing its legitimacy and representation in light of the over 170 countries that do not have a seat at the table. This idea was also discussed and debated among participants at a recent high-level conference on the G-20, hosted by Brookings, the Korea Development Institute and the Centre for International Governance Innovation.

The IMF

Clearly, for the above proposal to be feasible, the IMF’s membership would need to show remarkable progress on quota realignment and composition of its executive board in order to give a greater say to the world’s lesser-represented regions. But it would also need to significantly sharpen the accountability of the executive board’s constituencies, which is currently non-existent. Quite significantly, the G-20 has “urged the IMF to deliver the quota and governance reforms” by the time its leaders meet in Seoul in November.

The IMFC has reviewed the internal work done by the IMF on the reform of its mandate, which appropriately was the topic of discussion at a Brookings-IMF conference last week. The idea is to provide the IMF with more traction among member countries by upgrading its legal, financial and institutional framework. As noted by an IMF official, the articles of agreement never refer to the word “financial” except when it comes to the institution’s own financial accounts. This is increasingly at odds with the expanded focus and responsibilities of the IMF vis-à-vis the global monetary and financial system.

The World Bank

At Development Committee meeting, President Robert Zoellick secured support for his proposed capital increase, which will add $5 billion of paid-in resources and an overall increase in its capital base (including callable capital) of $86 billion. This will likely increase pressure on the World Bank to link its lending volume to better results on the ground, which has been a long-standing call of several the bank’s donors and shareholders. However, the capital increase needs to be complemented by a sharper vision of the bank's future, which should ideally leverage on a wider debate among shareholders and stakeholders alike.

The capital increase also shifts around 3 percent of the voting power from industrial to developing countries, whose overall voting share has now risen from 44 to 47 percent. This means that in a few more years from now the two groups of members will broadly achieve parity as far as their respective voting power is concerned.

What’s Next?

Just a few days after the meetings, markets in Europe tumbled amidst evidence that the Greek crisis has now spread to other countries in the euro area, such as Portugal and Spain. An indirect confirmation that the Greek crisis is becoming “systemic” is the recent conference call between President Obama and German Chancellor Merkel, in which the White House pressed the Europeans for a timely and resolute response, exactly the opposite of what the Europeans have offered so far. It would appear that we are in for more and larger IMF programs in Europe in the weeks to come, and not just in Greece.

The Greek crisis is yet another example of how the globalization of financial and economic activities may quickly transmit shocks from one country to the others. This also highlights the fundamental asymmetry between the scope of today’s financial and economic activities and the underlying institutional framework. The first have become increasingly global but the second have remained national and, as Europe shows, not even regional.

Authors

Domenico Lombardi

Image Source: Stephen Jaffe

The G-20, Development and a Framework for Sustainable Growth

Homi Kharas — Tue, 27 Apr 2010 11:30:00 -0400

The Group of 20 Finance Ministers and Central Bank Governors met on Friday, April 23, to discuss their framework for strong, sustainable and balanced growth. This is the very first time that leading world economies coherently reviewed their vision for global economic forecasts, not just in terms of growth, but in terms of fiscal, social and environmental sustainability and balance across and within countries. If nothing else, this framework can become a blueprint for stabilizing business expectations—one of Keynes’ original goals for the Bretton Woods system.

Although the G-20 is a self-appointed club, the communiqué is clear in saying that officials considered the implications of their own national policies on all countries and regions of the world. The G-20 ministers also believe there are opportunities for superior global outcomes based on collective action formulated through mutual policy assessment.

This is an outcome of enormous importance for developing countries. The framework provides a mechanism for putting on the table a range of beggar-thy-neighbor policies, like exchange rates, regulations, trade restrictions and conditionalities, that developing countries have long complained tilt the playing field against them. It also promises action against major global shocks—food, fuel and finance—that have periodically set back the cause of development in so many countries.

The good news is that the new framework provides a platform for discussing these issues. The not-so-good news is that there is as yet no indication of whether a discussion platform will actually result in any changes in individual country national policy. After all, there have been many other such efforts at international economic policy coordination. The International Monetary and Financial Committee, the IMF’s Multilateral Surveillance and the Development Committee were set up for precisely such purposes. But without any enforcement powers, these forums became all talk and no walk. It remains to be seen whether the G-20 can rise above the logic of geopolitics as practiced at present and actually act to create a better global growth environment.

So here’s a test for the G-20 that could signal whether it will really take action.

The global recovery is all about ensuring an adequate expansion in private sector demand. There are two large sources of demand in the world whose full potential is not being tapped: consumption by an emerging middle class in middle-income countries and infrastructure in all developing countries. The former means less domestic savings; the latter means more investment. The combination means a greater need for foreign capital to flow into developing countries.

The problem is that many developing countries are unwilling to expand to their full potential because they worry that the financing needs will expose them to excessive risk. They are right to worry. Asia, Latin America, Eastern Europe and Africa have all had experiences over the last 20 years of “sudden stops” of private capital flows—indeed capital reversals—through no fault of their own. In several cases, the result has been a crisis that has had serious costs to growth.

Unleashing the demand potential in developing countries therefore also requires a sustainable and predictable flow of capital to these countries. This is where current geopolitics comes in. The existing institutions tasked with funneling money to developing countries are running out of headroom as a result of their expansion during the current crisis. The World Bank, African Development Bank, Inter-American Development Bank and European Bank for Reconstruction and Development are asking for general capital increases this year. But the major shareholders, the Europeans, the U.S. and Japan, are all struggling with large fiscal deficits of their own. They are reluctant to pony-up more money.

That would not be an insuperable obstacle as there are many other countries, including emerging economies themselves, who would be perfectly happy to provide new equity to the multilateral development banks. But that would mean that existing shareholders would be diluted—their influence and share of votes would have to go down. That is not something they are currently prepared to tolerate. As a result, the solution is to go slow on any new capital increases and not to allow emerging economies to significantly increase their contributions.

What this means in practice is that the institutions that were designed to channel large, stable financial flows to developing countries will be unable to play this role in the post-crisis world. For example, the Development Committee of the World Bank, the largest of the development banks, endorsed a proposal for a paid-in capital increase of just $3.5 billion that would keep its post-crisis net lending—new lending minus repayment of outstanding loans—at around $3 billion per year. This is a tiny amount considering the Bank estimates that infrastructure investment, operation and maintenance needs in developing countries are $200 billion a year higher than current spending levels.

So this is the dilemma: a strong, sustainable and balanced growth framework would require far more financing to a broad range of developing countries. Stable and predictable financing to these countries can best come from the multilateral development banks. But these banks are being constrained by their shareholders who neither wish to inject sizeable new capital themselves, nor permit the dilution in their influence that would come from allowing others to inject new capital. The new growth framework is at odds with the old geopolitical framework. The outcome of the discussions on the multilateral bank capital increases will reveal much about whether the G-20 is going to be a serious global steering body or just another talk shop.

Authors

Homi Kharas

Image Source: Stephen Jaffe

Roundtable on IMF Surveillance: Promoting Global Economic and Financial Stability

Mon, 26 Apr 2010 09:00:00 -0400

Event Information

April 26, 2010
9:00 AM - 2:00 PM EDT

The Brookings Institution
1775 Massachusetts Ave., NW
Washington, DC

The world has changed in important ways since the late 1970s when Fund surveillance started: capital flows now dwarf trade flows, many members are integrated into world capital markets, and the interconnectedness of financial sectors has increased, allowing rapid transmission of crises across the globe. Yet, the way the Fund undertakes surveillance has not changed very much and is pretty much the same for all members, systemic and non-systemic. The increasing financial interconnectedness of countries, as demonstrated by the recent crisis which originated in advanced systemic countries, has implications for surveillance—both substance (what surveillance should do) and modalities (how to do it).

On April 26, 2010, the Global Economy and Development Program at Brookings and the International Monetary Fund (IMF) co-hosted a private half-day roundtable to discuss modernizing the fund’s surveillance work. Approximately 40 leading international economists, academics, policymakers, private sector executives and civil society representatives from around the world gathered to discuss and debate, under Chatham House Rule, reforms to the IMF’s mandate that would enable it to more effectively promote the stability of the global monetary and financial system.

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Europe's Governance Stalemate Causes Gridlock for Global Governance Reform

Amar Bhattacharya, Colin I. Bradford and Johannes F. Linn — Fri, 23 Apr 2010 00:00:00 -0400

Over the last six decades, European countries have moved in what often seemed like a slow and convoluted path toward closer cooperation. Yet, after a history of war and colonialism Europe’s transformation into a peaceful continent, a constructive neighbor and a generous international donor is a great benefit to the world.

However, at the upcoming IMF and World Bank spring meetings, Greece’s ongoing financial crisis will illustrate the challenges that Europe still faces in creating a strong and cohesive union, as well as the risks of global financial instability should Europe fail to manage threats of a Greek default. Moreover, the ongoing debates about IMF and World Bank governance reform are a reminder of Europe’s continual inability to create a coherent geopolitical presence, which is now becoming a major obstacle to effective global governance. To put it bluntly, the stalemate of Europe’s internal governance reform is creating gridlock for reform of global governance.

It is clear that the global institutions created after World War II do not reflect the economic and political realities of the 21^st century. The end of colonialism, the rise of large emerging markets, the growing interconnectedness of world economies and the threats of global financial instability and climate change require inclusive, representative and effective global institutions. This has put a spotlight on existing international organizations, including the G8, UN Security Council, IMF and World Bank, and their governance structures. All of them reflect the past dominance of Europe and the United States and must be reformed to represent the new balance of world economic and political influence.

Europeans tend to think of the U.S. as the superpower promoting its own values through unilateralism, exceptionalism and hard power, unwilling to give up its privileges in international institutions. They see Europe as a harmonious community of diverse nations with a preference for compromise and soft power. In fact, Europe often aggressively projects “European values” in foreign relations, touts its experience of multinational integration as an example for others and insists on representation in international institutions far beyond its actual size or strength.

Excluding Russia, Europe occupies four seats at the G8 and two of the five permanent seats on the UN Security Council. It occupies eight to nine of the 24 seats at the IMF and World Bank and represents about 30% of their voting share. This compares with Europe’s share of 7.5% in the world’s population and 23% in the global economy. The Europeans also have traditionally nominated the head of the IMF. In the newly created G-20 summit, Europe occupies five of the 20 seats, a more reasonable share than the 50% in the G8. However, the addition of the Netherlands and Spain raises the de facto representation of Europe at G-20 summits. European requests for an additional “Nordic chair” and a seat for the political head of the Eurozone at the G-20 further reflect the sense of entitlement to an extraordinary role in international forums.

There have been calls for a reduced representation of Europe in the major global institutions and a reallocation of its voting shares and governance arrangements that is more closely aligned with its current global economic and political weight. In the World Trade Organization, the European Union is already represented as a single entity, but this remains the exception. With only limited EU constitutional reforms agreed under the Lisbon Treaty, stalemate prevails in EU reform of its foreign policy process. This perpetuates the EU’s inability to speak with one voice, to cast a singular vote, and to occupy one or at least fewer chairs in international organizations. This has become a major stumbling block for global governance reform. Since the Europeans are unwilling to give up on excessive individual country representation and voting shares in the governing boards of the international organizations, they keep out other key players and prevent a recalibration of voting structures that reflect today’s changing global realities.

The consequence of this is four-fold: First, global governance reform faces gridlock. Second, international institutions lose effectiveness and legitimacy. Third, formal European dominance in these institutions is rendered meaningless by the cacophony of European voices and lack of cohesion in votes. Fourth, Europe over time is increasingly marginalized in global decision making. This outcome serves neither global nor European interests. It may be counter-intuitive, but if the Europeans give up votes and chairs in the international institutions, they will wield more influence in more effective global institutions.

Until the Europeans are ready to address their own governance challenge, there is little hope for effective reform of global governance structures. But we sense a growing impatience in the rest of the world with European exceptionalism. Furthermore, the global financial crisis, followed now by the Greek financial upheavals, has put the Europeans on notice that business as usual will not work for them. We hope that the European political leadership will grasp this opportunity to change the way in which Europe acts on the global stage.

Authors

The New Dynamics of Summitry: Institutional Innovations for G-20 Summits

Wed, 21 Apr 2010 08:30:00 -0400

Event Information

April 21-22, 2010

The Brookings Institution
1775 Massachusetts Ave., NW
Washington, DC

As the world begins to see signs of economic recovery, and the need for urgent crisis management fades, the future of the G-20 as the global steering committee for the world economy is uncertain. Will the policy coordination surrounding the London and Pittsburgh Summits carry on beyond the recovery phase of the global financial crisis? Participants underscored the significance of the upcoming summits, which are, in a sense, a litmus test for how the G-20 will succeed as a coordinating forum and whether it can demonstrate its functionality and legitimacy despite over 170 countries not having a seat at the table.

On April 21-22, 2010, the Global Economy and Development program at Brookings co-hosted a roundtable on the future of the G-20 Summit with the Korea Development Institute (KDI) and the Centre for International Governance Innovation (CIGI) in Canada. With upcoming summits in Toronto in June and Seoul in November, the private event provided a unique forum for policymakers, experts, opinion leaders and researchers from around the world to gather and exchange views on how best to cement the G-20 Summit as the premier forum for international economic cooperation. Approximately 50 high-level participants attended, including Changyong Rhee, G-20 sherpa to the President of the Republic of Korea, and Michael Froman, sherpa to the President of the United States.

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Governance Shares for the International Monetary Fund: Principles, Guidelines, Current Status

Ralph C. Bryant — Tue, 20 Apr 2010 11:09:00 -0400

SUMMARY

During coming months, member governments will again re-negotiate quota shares and voting-rights shares – "governance shares" – for the International Monetary Fund. This essay emphasizes principles and guidelines that, ideally, should influence the negotiations.

By emphasizing basic principles and introducing ideas not currently entertained, the analysis here is out of tune with the ongoing negotiations. Nonetheless, some participants and observers may find it helpful to stand back, pondering an overview of the issues. Moreover, governments will eventually find themselves pushed to allocate governance shares in the IMF with guidelines that are more defensible and that can be better sustained for the longer run. The analysis here should be, at the least, a cautionary check on the propensity to make short-run choices that exacerbate future problems.

The essay begins with relevant principles and then explains the need for a "quota formula," an objective assessment of countries' relative status in the world polity, economy, and financial system. No one formula can be judged as unambiguously preferable. But a powerful case exists for developing a satisfactory formula as an objective starting point for negotiations. An objective formula is a presumptive norm superior to alternative procedures ignoring an objective assessment of the relative status of members. The final outcome of negotiations should be an artful blend of formula calculations and constructive political bargaining.

The preferred structure for a quota formula incorporates variables expressed as the fractional shares of an IMF member in a global total. Ratio-share variables should be included as well as level-share variables. Ratio-share variables can better identify features of members’ economies and polities that are qualitatively distinct rather than dominantly determined by economic size.

The most comprehensive gauges of countries' relative economic status are based on gross domestic product or income – measured at market prices and exchange rates, measured at purchasing-power parities, or measured as a blend of both. GDP-based variables are the single most important class of variables for a quota formula. Other gauges, however, can be judged relevant. In principle, financial-activity variables should be incorporated (although lack of sufficient data for all IMF members will probably prevent that from happening in the near future). Shares in world population merit inclusion (notwithstanding the failure of official discussions to seriously discuss that possibility). Two ratio-share variables that deserve consideration are the ratio of gross cross-border current-account transactions to market-price GDP (an analytically more appropriate measure of current-account openness than the faulty "openness" variable currently in use) and a scaled gauge of the variability of cross-border transactions (the ratio of standard-deviation calculations of variability scaled by market-price GDP). Alternative conceptual perspectives can of course lead to different choices about the variables to be included in a quota formula.

Against the background of principles and general guidelines, the essay examines the current quota formula that was agreed at the time of the package of governance reforms concluded in April 2008. The communique of the September 2009 G-20 meeting in Pittsburgh indicated that “we [G-20 leaders] are committed to a shift in quota shares to dynamic emerging market and developing countries of at least five percent from over-represented to underrepresented countries using the current IMF quota formula as the basis to work from (italics added). We are also committed to protecting the voting share of the poorest in the IMF.” Unfortunately, there is no straightforward way – however the words are interpreted – to use the current formula as a basis for meeting that commitment. The current formula justifies a large calculated increase in quota share for China, substantial increases for countries such as Mexico, Brazil, Turkey, and moderate increases for some dozen other emerging-market countries. But it calculates declines in quota shares for countries such as India, Russia, Pakistan, and Peru. For the aggregate of all countries other than China, India, Brazil, Mexico, and Russia that are classified as not-advanced and not-higher-income, the formula mandates a share reduction of 3.09 % points. The G-7 countries taken together are calculated as over-represented by the meager amount of only 0.31 percentage points. For the 71 countries eligible as of late 2009 to borrow from the IMF's Poverty Reduction and Growth Trust Facility (PRGF), the formula calculates a decline in aggregate share of 1.74 percentage points.

The current formula imposes an arbitrary mathematical device of a "compression factor." If this compression factor is removed from the calculations, the results from using the current formula are still more problematic. For example, the G-7 countries are calculated to be underrepresented by 2.35 percentage points! For the 71 PRGF countries, the current formula without the compression factor points to an even larger decline in aggregate share of 2.16 percentage points.

The conclusion seems inescapable that the current formula is an inadequate basis from which to work if the intent really is to significantly increase the aggregate quota share of dynamic emerging-market and developing countries by at least 5 percentage points. And the current formula points in the wrong direction if the goal is to prevent a diminution in the quota shares of the IMF's poorest members. Semantic euphemisms aside, negotiators will have to abandon the current formula and find some better way to construct and explain their decisions.

One possibility would entail de facto jettisoning of all formulas and negotiating a bargaining outcome that could command consensus from the largest, most influential IMF members. Yet that course would undermine, now and for the future, development of a presumptive norm for objective assessment of countries' relative status.

To encourage thinking about possible revisions in the quota formula, the essay describes an illustrative revised formula and reports results from its use. That illustration raises the combined weight associated with GDP variables; reduces the weights on gross cross-border transactions, on unscaled variability, and on international reserves; adds a new variable for shares in world population; and introduces ratio-share variables for current-account openness and scaled variability. The illustrative formula is not so much a recommendation as a catalyst for further thinking about how to improve the ability of the quota formula to achieve systemic IMF goals.

The illustrative formula generates very different conclusions from those obtained with the current formula. For example, the G-7 countries are over-represented by the large amount of 4.72 % points. China is calculated with a much larger quota share; the calculated shares of India, Brazil, and Mexico are significantly larger. The 78 poorer IMF members eligible to borrow from the IMF's PRGF are under-represented by 5.02 % points (instead of over-represented by 2.25 % points).

The illustrative formula is an improvement in several respects. But other aspects are problematic. For many IMF members, the calculated increments in shares would be controversial. No doubt many official participants in the negotiations will perceive the illustration as going too far in shifting quota shares away from developed and toward emerging market and developing members.

The adjustments in quota shares to be decided in the upcoming negotiations – and, in turn, the changes in voting shares derived from them -- are just part of the large subject of reforms for IMF governance. The size and composition of the IMF Executive Board, and hence the organization of members into constituencies, are at least as important. Other key issues include the size of prospective quota increases and SDR allocations, and implementation of the Council provided for as a possibility in the Articles of Agreement.

This essay has a restricted focus and does not try to cover the other dimensions of governance reform. Yet those dimensions are closely interdependent with what has been analyzed here. An improved formula and procedures for allocating quota shares is a necessary condition – necessary, but not sufficient – for satisfactory resolution of the whole range of governance issues.

The world community in the upcoming negotiations in 2010 should frankly acknowledge the inadequacy of the existing quota formula and try to reach agreement on an improved approach for the determination of governance shares.

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Authors

Ralph C. Bryant