RefoRm of the

30Group of Thirty

About the Authors

The views expressed in this paper are those of the Working Group on the Reform of the International Monetary Fund

and do not necessarily represent the views of all of the individual members of the Group of Thirty.

ISBN I-56708-148-7Copies of this report are available for $30 from:

The Group of Thirty1726 M Street, N.W. Suite 200

Washington, D.C. 20036Tel: (202) 331-2472 Fax: (202) 785-9423www.group30.org · email:info@group30.org

Published in October, 2009.

RefoRm of the

30Group of Thirty

3

5

EU EuropeanUnion

FSAP FinancialSectorAssessmentProgram

FSB FinancialStabilityBoard

FSF FinancialStabilityForum

FSSA FinancialSectorStabilityAssessment

GDP GrossDomesticProduct

IEO IndependentEvaluationOffice

IMF InternationalMonetaryFund

IMFC InternationalMonetaryandFinancialCommittee

MoU MemorandumofUnderstanding

NAB NewArrangementstoBorrow

NGO Nongovernmentalorganization

PPP PurchasingPowerParity

ROSC ReportontheObservanceofStandardsandCodes

SDRs SpecialDrawingRights

7

Foreword

This reportunderscores the continuedneed

forreformoftheIMF.Tothatend,itidentifies

anumberofkeyrecommendationsforreforms

thatwebelievearenecessaryasregardsgover-

nance,resourcesand,mostimportant,surveil-

lance,bothbilateralandmultilateralinnature.

Itisonlywitheffectivegovernancereformthat

enhancesthelegitimacyoftheFundthatitcan

achievethenecessarychangesinsurveillanceto

maketheprocessmoreeffectivenotonlyforthe

smaller member countries but also, and most

important, as applied to the largest and most

systemically significant countries that have

tendedtopaytoolittleattentiontothiscentral

monitoringfunctionoftheFund.

The Working Group feels strongly that the

reforms we have identified would help ensure

that the IMF can strengthen its surveillance

role, build its early-warning facilities, and,

importantly, enhance its legitimacy among

member governments, thebroaderpublic, and

theinternationalcommunityatlarge.

The Working Group urges the leadership

oftheG-20,themembercountriesoftheIMF

anditsmanagement,andotheractorstowork

TheGroupofThirty’s(G30’s)missionistodeepenunderstandingofinternational

economicandfinancialissues,toexploretheinternationalrepercussionsofdeci-

sionsmadeinthepublicandprivatesectors,andtoexaminethechoicesavailable

to market participants and policymakers. This report continues the G30’s long

historyofrespondingtochallengesfacedbythesupervisory,centralbanking,and

financialcommunitieswithrecommendationsthatcanbeadoptedbypolicymakers

acrosstheglobe.

The Group decided in May 2009 to com-

mencearapidanalysisof theunderlying justi-

ficationsforfurtherreformoftheInternational

MonetaryFund(IMF)inresponsetoaconcern

felt by many in the G30 that, as the immedi-

atesevereeffectsofthefinancialcrisisbeganto

wane,theimpetusforreal,substantive,andlong-

lastingreformofthiskeyinternationalfinancial

institution would diminish and begin to stall.

Thisreport,theculminationofthateffort,isa

natural complement to the G30’s recent study

reportsonfinancialsupervision(The Structure

of Financial Supervision: Challenges and

Opportunities in a Global Marketplace,2008)

and on a framework for financial stability

(Financial Reform: A Framework for Financial

Stability,2009).Thereportdrawsonthework

of others, most notably on the recommenda-

tions of the Committee on IMF Governance

Reform, appointed by the Managing Director

of the Fund and chaired by Trevor Manuel

of South Africa, the work of the Fund’s own

Independent Evaluation Office, and the High

Level Group on Financial Supervision of the

EU, chairedbyJacquesdeLarosière.

R e fo Rm o f t h e

collaborativelyandmoveforwardwithdispatch

tocreateastrengthenedorganization.Thenew

IMFshouldbebetterpreparedtoperformmul-

tilateral surveillance in the future in a man-

nerthatwillassistpolicymakersinidentifying

developing risks and in responding to them

beforetheymutateintosevereregionalorglobal

financialcrisessuchastheextremelysevereone

wehavealljustlivedthrough.

9

OnbehalfoftheentireGroupofThirty(G30),

I would like to express appreciation to those

whosetime,talent,andenergyhavedriventhis

projecttosuccessfulfruition.

In particular, I would like to acknowledge

theleadershipandworkofthemembersofthe

SteeringCommittee,includingStanleyFischer,

ArminioFragaNeto,andGuillermoOrtiz,who

workedconsistentlyontheprojectandprovided

invaluableinput.TheSteeringCommittee’scol-

lective understanding of what it takes to lead

theInternationalMonetaryFund(IMF)andof

theurgentneedforsubstantiveandfundamen-

tal reformof this key international institution

ismuchappreciatedandisreflectedinthefinal

product.

Special recognition must also go to those

membersoftheG30whoactivelyparticipated

in the Working Group’s project deliberations

anddiscussions.

Crafting a thoughtful, precise report that

addresses the fundamental reforms necessary

for the IMF to work most effectively in the

future requires considerable knowledge of the

issuesandanabilitytosynthesizetheviewsof

numerousindividuals.Weparticularlyappreci-

ate theworkof theSteeringCommitteemem-

bersandourG30colleaguePeterKenen,who

served on the Steering Committee and as the

principal draftsman of the report, and who

brought extraordinary experience and accom-

plishmenttothattask.

Thanksalsogototheeditor,DianeStamm,

and the designers, Sarah McPhie and Katie

Burgess,fortheirdedicatedeffortsandflexibil-

ityworkingonthisproject.

Finally,thecoordinationofthisprojectand

themanyaspectsofreportproductionhadtheir

logistical center at theofficesof theGroupof

Thirty.Thisprojectcouldnothavebeencom-

pleted without the efforts of the Executive

Director,StuartMackintosh,andtheAssociate

Director, Sviatlana Francis, of the Group of

Thirty.

JacobA.Frenkel

Chairman and CEO

Group of Thirty

11

ChairmanandCEO,GroupofThirty

FormerGovernor,BankofIsrael

FormerCounselor,DirectorofResearch,InternationalMonetaryFund

Governor,BankofIsrael

FormerFirstManagingDirector,InternationalMonetaryFund

FoundingPartner,GáveaInvestimentos

ChairmanoftheBoard,BM&F-Bovespa

FormerGovernor,BancoCentraldoBrasil

WalkerProfessorofEconomics&InternationalFinanceEmeritus,PrincetonUniversity

FormerSeniorFellowinInternationalEconomics,CouncilonForeignRelations

Governor,BancodeMexico

ChairmanoftheBoard,BankforInternationalSettlements

FormerSecretaryofFinanceandPublicCredit,Mexico

ExecutiveDirector,GroupofThirty

R e fo Rm o f t h e

ExecutiveSecretary,GroupofThirty

President,GeoffreyBell&Company,Inc.

ChairmanandCEO,DFCAssociates,LLC

FormerMinisterofEconomy,Argentina

AdvisoryDirector,MorganStanley

FormerPresident,MorganStanley

International

FormerCOO,FederalReserveBank

ofNewYork

SeniorAdvisor,FinancialStabilityInstitute

FormerU.S.ComptrolleroftheCurrency

ViceChairmanoftheGoverningBoard,

SwissNationalBank

FormerPartner,MooreCapitalManagement

Conseiller,BNPParibas

FormerPresident,EuropeanBank

forReconstructionandDevelopment

FormerGovernor,BanquedeFrance

FormerManagingDirector,

InternationalMonetaryFund

FormerDeputyGovernor,BankofJapan

FormerDeputyGovernor,Japan

DevelopmentBank

SeniorViceChairman,CitigroupandCitibank

Chairman,PromontoryEurope

FormerMinisterofEconomyandFinance,

Italy

FormerChairman,InternationalAccounting

StandardsCommittee

FormerMemberoftheExecutiveBoard,

EuropeanCentralBank

PartnerandSeniorAdvisor,

TheRohatynGroup

FormerManagingDirector,JPMorganChase

FormerManagingDirector,WorldBank

MinisterofFinance,Singapore

FormerManagingDirector,Monetary

AuthorityofSingapore

President,EuropeanCentralBank

FormerGovernor,BanquedeFrance

Director,YaleCenterfortheStudy

ofGlobalization,YaleUniversity

FormerPresidentofMexico

* Allthemembersparticipatedintheprojectintheirindividualcapacities.Theviewsexpresseddonotnecessarilyreflectthoseoftheinstitutionswithwhichthemembersareaffiliated.

# Observers.

13

TheGroupofThirtyWorkingGroupon theReformof the InternationalMon-

etaryFundwasestablishedinMay2009toaddresstheneedforfurtherreformsin

thiskeyinternationalfinancialinstitution.Theworkinggroupincludedindividu-

alswhoservedinleadershippositionsintheFundandincountriesthathaveused

Fundresources.AlloftheWorkingGroup’smembersarefamiliarwiththechal-

lengesfacedbytheFundandthedifficultiesinachievingmeaningfulreform.

Monitoring of emerging systemic risks and

theprovisionoftimelyearlywarnings;

Performing macroeconomic and prudential

analysesthatprovidesmemberswithacon-

sideredviewof futurerisks toglobalfinan-

cial stability, with a focus on the largest,

mostsystemicallysignificanteconomies;

Addressing balance-of-payments crises in

member countries and, where needed, pro-

viding financing to member countries, cou-

pledtonecessaryconditionality;

Acting as a global reserve, via its liquidity

facilities;and

RevivingtheoriginalpurposeoftheFundas

setoutintheArticlesofAgreement,Article

I(i), “To promote international monetary

cooperationthroughapermanentinstitution

whichprovides themachinery for consulta-

tionandcollaborationoninternationalmon-

etaryproblems.”

TheFundisunique,andhasauniquelegiti-

macy in that it is a near-universal institution,

establishedbytreaty,withahighlyprofessional

The Working Group is strongly of the view

thatthefinancialcrisisexposednotonlymajor

institutional failures on the part of financial

institutions,regulators,andinternationalfinan-

cial institutions, including the International

Monetary Fund (IMF)—though the Fund’s

Global Financial Stability Reports certainly

issued some of the most prescient warnings

about global financial instability in the period

before thecrisisbroke.Thecrisisalso revealed

the interconnectedness of national economies

aroundtheglobe.Asgovernments,financemin-

istries, and central banks continue to work on

the reform of the international financial archi-

tecture, to address and correct these failures

individually and holistically, they are urged to

reformtheFundtobetterreflectglobalrealities.

TheWorkingGroupbelievesthatthemission

ofa reformed IMFmustbe clearly statedand

understood by all the stakeholders. That mis-

sionshouldincludethefollowing:

Delivering unbiased, respected analysis and

macroeconomic advice, both confidential

and public, via an enhanced bilateral and

multilateralsurveillanceprocess;

R e fo Rm o f t h e

staff,inwhichtypicallybothfinanceministries

andcentralbanksrepresenttheircountries.

Yetsignificantreformsarenecessaryintwo

areas for the Fund to better serve its member

countriesandtoenhance its legitimacy. First,

the governance system of the Fund must be

reformed. Second, and equally important, the

Fund’ssystemofbilateralandmultilateralsur-

veillance must be reinforced, buttressed, and

made more effective. Indeed, bolstering the

multilateral and cross-country perspectives in

its bilateral surveillance and placing greater

focus on international economic and financial

linkagesandspilloversarekey.Cross-checking

between multilateral and bilateral surveil-

lancewillhelptopromotebothpoliciesatthe

national level that are consistent with other

domesticpoliciesandglobaladjustmentwithin

the international monetary and financial sys-

tem. Moreover, the Working Group members

notethattheFunddoesnotoperateinavacuum

and must collaborate with many institutions,

including with the Financial Stability Board

andtheWorldBank,andthat,inparticular,the

former linkage shouldbe further clarifiedand

strengthened.Toachievethesegoals,thisreport

recommendsthefollowingmajorchangesinthe

governanceandfunctioningoftheFund.

The members of the G30 Working Group on

the reform of the IMF believe that a number

ofkeygovernancereformsmustbeundertaken

to strengthen the Fund and to ensure that its

institutional structure better reflects changing

globaleconomicrealitiesandrelationships.The

reportrecommendsthat:

In the future, quota adjustments would

be better achieved through a regularized

automatic process. Under such a system,

quotareviewwouldoccureveryfouryears,

usingtheexistingformula,withareviewand

if necessary changes to the quota formula

everyeightyears.Further,nosinglecountry

shouldretainavetooverFunddecisions.

The

Council should replace the International

MonetaryandFinancialCommittee(IMFC),

andwouldprovidestrategicdirectiontothe

Fundanddiscusspolicycoordinationneeds.

It would exercise oversight of the Fund’s

ExecutiveBoardandmanagement.Itwould

alsoinitiatemultilateralconsultationsaimed

at reaching agreement among the partici-

pating governments on policy responses to

majoreconomicproblems.

In the future, the

Board should focus more on strategic mat-

tersandleaveday-to-dayoperationalmatters

totheManagingDirectorandstaff.

Inparticu-

lar,thispositionshouldnotbeallocatedon

thebasisofnationality.

Recent commitments

include the creation of the Flexible Credit

Line,thesignificantenhancementstopoten-

tial financing through the issue of Special

DrawingRights(SDRs),theexpansionofthe

New Arrangements to Borrow (NAB), and

the development of Fund borrowing agree-

mentswithindividualmembercountries.

Therefore,itisessential

thatFundquotasincreasesignificantlyinthe

14thquotareview.

The members of the G30 Working Group

underscore that the current financial crisis

exposed failings in theFund’s systemofbilat-

eralandmultilateralsurveillance.Theseweak-

nesses are linked to the reluctance of certain

membercountriestoacceptsurveillanceadvice;

in some important cases member countries

ignoreitentirely.Theproposedreformswould

strengthenandbuttresstheFund’ssurveillance

function.Thereportrecommendsthat:

Governments should be obliged

to respondpromptly to those recommenda-

tions. Their responses and any subsequent

failuretoactshouldbebroughttotheatten-

tionoftheExecutiveBoard.

The Fund should monitor

theirprogressincomplyingwiththerecom-

mendations made by the FSAP. Members

whoseFSAPreportswerecompletedseveral

yearsagoshouldinvitenewreviewsoftheir

financialsystems.

Thenextcri-

sismaytakeplaceinthecoreofthefinancial

system,butitcouldjustaswellbeafiscalor

debtcrisisoran“old-fashioned”balance-of-

paymentsand inflationcrisis.Whatever the

cause,theFundmustenhanceitsabilitytodo

whateverittakestogetaheadofthecurveon

areal-timebasis.

The

Managing Director, advised by his or her

staff,shouldbeauthorizedtoissuesuchwarn-

ingswhendeemednecessary.TheFundmust

beabletoactasatrustedadviserinprivate.

However,intheinterestoftransparency,the

Fundmustbalancethisrolewiththeneedto

ultimatelymakeitsrecommendationspublic.

R e fo Rm o f t h e

InternatIonal CoordInatIon

The members of the G30 Working Group on

theReformoftheInternationalMonetaryFund

believethattherelationshipbetweentheFund

and the newly empowered Financial Stability

Board (FSB) must be formalized to enhance

coordinationandcooperationbetweenthetwo

institutions.

Care should

be taken to avoid duplication of tasks or

responsibilities.Thesurveillanceoffinancial

risks in member countries and globally

must be part of the Fund’s surveillance

responsibilities.

JointmissionsoftheFund

andmembersoftheFinancialStabilityBoard

couldwellbeveryusefulinthiscontext.

The members of the G30 Working Group

believe theabove reformsarenecessary to the

restorationof confidence in the supervisionof

theglobalfinancialsystemanditsstability,and

urgetheirpromptadoption.

17

R e fo Rm o f t h e

.....................................

1 MembersoftheG8areCanada,France,Germany,Italy,Japan,Russia,theUnitedKingdom,andtheUnitedStates.

2 See,inparticular,Financial Reform: A Framework for Financial Stability,January2009.ForacopyofthispublicationpleasevisittheG30websiteatwww.group30.org.

This report addresses a vital aspect of the international policy response to the

globalfinancialcrisis,namelythestepsnecessarytoensurethattheInternational

MonetaryFund (IMF) isable toplayanenhancedrole inpromoting the future

stabilityofnationaleconomiesandoftheglobaleconomy.

financialmarketswerenotonlyabletoallocate

resourcesefficientlybutalsotomanagecomplex

risks.Theviewwasthatthesesystemsweresup-

portedbystrongelements(orpillars)ofmarket

discipline: financial institutions with sophisti-

catedriskmanagementsystems,regulators,rat-

ingagencies,andthedifferentmechanismsfor

international cooperation. The financial crisis

shattered thisparadigm.Weak regulatoryand

supervisory frameworks, excessive reliance on

self-regulatedmarkets,distortedincentivesthat

converged to extreme risk taking in search of

short-term profits, and lax lending standards

madethefinancialsectorextremelyvulnerable.

Many of these issues have been addressed by

previousG30reports.2

Webelievethatgloballeadersmustrecognize

that,whiletheIMF’sGlobal Financial Stability

Report accurately warned about some of the

keyrisksfacingtheinternationalfinancialsys-

tem,theFundfailedinoneofitsprincipalmis-

sions—toconvinceitsmembergovernmentsof

the risks to the world economy posed by the

emergingfinancialcrisisintheUnitedStatesand

byotherimbalancesthatwereevidentelsewhere

priortothecrisis.TheFundurgedthemtotake

appropriateaction, individuallyandcollective-

ly,tolimitthethreatposedbythecrisistothe

stabilityoftheglobaleconomy.TheFundwas

notcomplacent,butitwasnotforcefulenough

in calling for concerted action to minimize

the damage to global stability and prosperity

The global financial crisis reflected major

institutional failures on the part of financial

institutions, regulators, rating agencies, and

international financial institutions, including

theIMF,andothermoreinformalmechanisms

forinternationalcooperation.Notwithstanding

pre-crisis G-81 rhetoric in support of interna-

tional coordination aimed at the resolution of

these problems, there was little political com-

mitmenttodealseriouslywiththeproblemsas

theyemerged.

Thecrisishadnumerouslinkedcauses.Itwas

aproductofacombinationofbothmacro-and

microeconomic failures.The crisishad itsori-

gins in a prolonged period of excess liquidity

andcreditexpansionleadingtogrowingglobal

imbalances(facilitatedbytheampleavailability

ofcurrentaccountdeficitfinancingandthewill-

ingness to accumulate large foreign exchange

reserves in surplus countries) and themispric-

ingofrisk.Inthissense,thecurrentcrisishas

manyoftheelementsofpreviousfinancialcri-

ses.Whatmakes this crisis unprecedented are

itssize,scope,andseverity.Thesecharacteris-

tics,inturn,aretheresultofthecrisisgenerated

intheworld’smostimportantfinancialcenter,

the massive amount of leverage and maturity

mismatches involved, extremely lax lending

standards,excessiverisktaking,andtheglobal

interconnectednessofthefinancialsystem.

The prevailing paradigm prior to the erup-

tion of the crisis was that lightly regulated

stemmingfromdevelopmentsintheworld’slarg-

esteconomyandinothermembercountries.3

One of the clearest pieces of evidence that

surveillancehasbeen ineffective relates to the

decisionsadoptedin2006tocomplementIMF

surveillance arrangements with multilateral

consultations.Thefirstconsultationfocusedon

globalimbalances.Theobjectivewastoprovide

aforumforimprovingunderstandingandshar-

ingviewsonglobalimbalancesandonhowbest

toreducetheminacontextofsustainingrobust

globalgrowth.Therecommendationsincluded

the following: steps to boost domestic saving

in the United States, including fiscal consoli-

dation; further progress in growth-enhancing

reforms in Europe; further structural reforms

in Japan, including fiscal consolidation;

reformstoboostdomesticdemandinemerging

Asia;greaterexchangerateflexibilityinanum-

ber of current account surplus countries; and

increased spending consistent with absorptive

capacity and macroeconomic stability in oil-

producing countries. These recommendations

wereinlargepartignored.

A successful multilateral consultation pro-

cess—that is,aprocess that leads toaction to

carry out the key recommendations—would

havecontributed toavoiding thecurrent crisis

or at least ameliorating the harshness of the

adjustmentprocess.TheFunditselfcanhardly

be blamed that its recommendations were not

implemented.Thatwastheresponsibilityofthe

member countries. However, there is always

an issue about how strongly the Fund issues

warnings, and—most important—how much

themembercountriesrecognizetheneedforthe

Fundtospeakout,evenwhentheyarethesub-

jectsofitscriticisms.

Weareconvincedthatnationalgovernments

must now exploit the opportunity created by

theeconomicandfinancialcrisisandtheappar-

ent G-204 consensus concerning the need to

enhancetheroleoftheIMF.

Thefirststepinthatreformprocessistoimple-

mentasamatterofurgencyaseriesofgover-

nancereforms,manyofwhichhavebeendebated

anumberoftimesinthepastandhavereceived

widespreadsupportfromdiverseconstituencies.

Thesereformsconcern:strengtheningthepoliti-

cal leadershipof theFund through theactiva-

tion of the IMF Council; a further realign-

ment of IMF quotas to enhance the influence

of emerging and developing economies; and

changesinthesize,makeup,andfunctioningof

theExecutiveBoard.

All of these reforms are absolute prerequi-

sitesfortheFundanditsmanagementtodeliver

formembercountriesonmultiplefronts.Justas

important,governancereformsarerequiredto

upholdthelegitimacyoftheFundandtomod-

ernizeitsoperation.AFundthatwasdesigned

at the Bretton Woods Conference before the

endofWorldWarIImusttodaybereformedto

reflectnewgeopoliticalandeconomicrealities.

Wearenot,however,naïve,andweunderstand

that governance reforms will require strong

leadershipandsupportfrommembercountries,

particularlythosethatcurrentlypossessthekey

.....................................

3 Someinstitutions,suchastheBankforInternationalSettlements,warnedofthedangersposedbydevelopmentsintheglobalfinancialsystem,buttheiradvicetosomeextentwasignoredbypolicymakers.Seewww.bis.orgfordetails.Theannualreportsleadinguptothecrisisprovideevidenceofthewarningsdeliveredtobutnotheardbypolicymakers.

4 ThemembersoftheG-20areArgentina,Australia,Brazil,Canada,China,France,Germany,India,Indonesia,Italy,Japan,Mexico,Russia,SaudiArabia,SouthAfrica,SouthKorea,Turkey,theUnitedKingdom,theUnitedStates,andtheEuropeanUnion,whichisrepresentedbytherotatingCouncilpresidencyandtheEuropeanCentralBank.Toensureglobaleconomicforumsandinstitutionsworktogether,theManagingDirectoroftheIMFandthePresidentoftheWorldBank,plusthechairsoftheInternationalMonetaryandFinancialCommitteeandDevelopmentCommitteeoftheIMFandWorldBank,alsoparticipateinG-20meetingsonanexofficiobasis.

R e fo Rm o f t h e

influence in the decision-making processes of

theFund.

Urgentreformsarealsorequiredtoenhance

the legitimacy and effectiveness of the Fund’s

surveillance mission. With the necessary sup-

port and tools at its disposal in the future,

the Fund’s surveillance, diagnoses, and policy

prescriptions should command respect, serve

asasourceof internationalexpertiseandbest

practice,andprovidesoundandcrediblepolicy

advice.TheFund’sunderstandingofeconomic

phenomenashouldbeaheadofthecurve,with

itsrecommendationsindependentandunbiased.

The Fund’s recommendations cannot languish

on a shelf in Washington, D.C., and instead

shouldbeacteduponbytheappropriateparties.

This report identifies reforms necessary to

prepare the Fund for this enhanced surveil-

lancerolepost-crisis.Weaddress thecoverage

andqualityofIMFsurveillance,withparticu-

lar attention to financial sector matters; the

redesignofmultilateralsurveillancetoelicitthe

policychangesthatgovernmentsareunlikelyto

adopt unilaterally, and the need for close and

mutually beneficial coordination between the

FundandtheFinancialStabilityBoard(FSB).

These reformsare required for theFund to

playthe largerrole that theG-20 leaders,and

themember countries that arenotpartof the

G-20,expectofitinthefuture.Theycannotbe

implemented,however,unlesstheFund’smem-

bersarepreparedtoactonmajorchangesinthe

Fund’s governance arrangements, in order to

refashiontheFundtomeetthechallengesposed

byarapidlychangingworldeconomy.

Reform of the IMF has been addressed

by other bodies and commissions. The G30

Working Group has drawn freely on their

work, especially the report of the Committee

on IMF Governance Reform,appointedbythe

ManagingDirectoroftheFundandchairedby

TrevorManuelofSouthAfrica,theworkofthe

Fund’sIndependent Evaluation Officeandthe

High Level Group on Financial Supervision of

the EU, chairedbyJacquesdeLarosière. Ithas

alsodrawnontheknowledgeandexperienceof

membersoftheGroupofThirtywhohavebeen

directly involved in leadershippositions in the

Fundandinmembercountries.

Itisparticularlyimportantthatthereforms

proposedinthisreportsecurethewholehearted

support of the Fund’s largest members, which

dominate the Fund’s decision-making process.

Without their active involvementand support,

the necessary reforms are not likely to mate-

rialize. Members of this Working Group urge

thosecountries’governments toplaya strong,

constructiveroleinthereformeffort.Onlywith

such commitments of political capital by the

leaders in whose countries the financial crisis

wasborn,andwiththeleadershipofthewider

membershipoftheFund,canweimplementreal

and lasting reform that enhances the Fund’s

legitimacy,effectiveness,andrelevance.

21

R e fo Rm o f t h e

WebelievethattheInternationalMonetaryFund’s(IMF’s)governanceandsurveil-

lancefunctionsarecloselyinterconnected.

When created, the IMF largely reflected

theeconomicpowerstructureoftheworld.In

recent years, however, a small groupof coun-

tries,generally identifiedas theG7,5hasexer-

cised a controlling influence on the institu-

tion.Yettheeconomicbalancehasshiftedand

evolved, and demands for better governance

haveemerged,particularlyfromthekeyminor-

ityshareholders,whoexpresstheviewthatthe

Fund’s current decision-making process lacks

appropriate political and economic legitimacy.

Ofcourse,itisdifficulttodemandattentionto

therecommendationsofaninstitutionthatlacks

legitimacyintheeyesofitsownmembers.Even

whentheFund’sanalysisisonpointandahead

ofthecurve,itrunstheriskofbeingdismissed

bybothconstituencies.Thecontrollingmember

countriesmaydisregarditsadvice,astheyhave

in the past. The emerging creditor nations of

theworldwithburgeoningsurplusesmaycon-

tinuetobelievethattheirvoicesarenotheard

clearly enough in the International Monetary

and Financial Committee (IMFC) and in the

ExecutiveBoard.

To address the matter of legitimacy and to

buildpoliticalsupportbehindthedecisionsand

adviceoftheFund,webelievethattherelevant

emerging countries must be given a greater

senseofresponsibilityforthefunctioningofthe

internationaleconomicsystem.Toachievethis

purpose,theemergingcountriesmustbegivena

largerroleinthegovernanceofthesystem.

Thishasbeenincreasinglyrecognizedbythe

internationalcommunity. In fact,duringtheir

April2009meeting,G-20leaderscommittedto

reformthemandates,scope,andgovernanceof

theIMFandotherinternationalfinancialinsti-

tutions, to reflect changes in the world econ-

omyandthenewchallengesofglobalization.6

Greater voice and representation of emerg-

ing and developing countries, and increased

credibility and accountability of the institu-

tions,wereconsideredtobeanessentialcom-

ponentoftheseefforts.G-20leadersproposed,

among other things, to move forward with

the reform of IMF quotas and representa-

tionagreed sinceApril2008and to complete

the 14th general review of quotas by January

2011.TheG-20alsocalledforconsiderationof

greaterinvolvementofofficialsattheministe-

riallevelinprovidingstrategicdirectiontothe

IMF.Finally,thegroupsupportedtheviewthat

the leadership of the IMF (and in general of

international financial institutions) should be

electedthroughamoreopen,merit-based,and

transparentprocess.

These are, indeed, steps in the right direc-

tion. However, we are concerned by the fact

that governance reform at the IMF is lagging

behindeffortsinotherareas.Furthermore,we

believe that reformof IMFgovernance should

gobeyondthemeasuresconsideredbytheG-20

leadersandthatthesechangesshouldbeimple-

mentedassoonaspossible.Consequently,this

Report formulates a series of recommenda-

tionsaimedatcorrectingimbalancesinquotas,

improvingdecisionmakingattheIMF,empow-

eringtheFundatthepoliticallevel,andachiev-

ing a more efficient division of labor between

theExecutiveBoardandManagement.

.....................................

5 ThemembersoftheG7areCanada,France,Germany,Italy,Japan,theUnitedKingdom,andtheUnitedStates.

6 TheG-20communiquéisavailableat:http://www.g20.org/pub_communiques.aspx.

Webelieve that theprocessofquotareview is

too slowand the resultingadjustments invot-

ing power are marginal, given the increased

economic significance of emerging countries

inrecentyears.7 It is therefore fundamental to

acceleratethe14thgeneralquotareviewandto

completeit inearly2011.Wealsobelievethat

fromthispointforwardamechanismofauto-

maticquotaadjustmentseveryfouryearsshould

beintroduced,sothatanychangesintheglobal

economyare reflected rapidly inquota shares.

Similarly,thequotaformulashouldbereviewed

ifnecessaryeveryeightyears.8

Tohaveanadequateimpactondecisionmak-

ingattheFund,thereviewofquotasharesmust

becomplementedwitheffortsinotherareas.

First, the authors support the view that the

Articles of Agreement of the Fund should be

amended to achieve a new and more balanced

compositionoftheExecutiveBoard.Atpresent,

European countries have eight of the 24 seats

availableontheFund’sExecutiveBoard.Wecall

for thereductionof this shareandsuggest that

Europeancountrieshave fourseatsatmost.9A

salutarysideeffectofanysensiblesolutionwould

beareductioninthesizeoftheExecutiveBoard,

althoughsomeoftheseatsvacatedcouldbetrans-

ferred toemerginganddevelopingcountries. In

additiontothereductionofthenumberofseats

on theBoard, thecombinedquota shareof the

EuropeanUnion(EU)countriesmustbeadjusted.

Moreover, a consolidation of the EU/euro-area

seatsontheFund’sBoardwouldbeusefulandin

theinterestofEuropeancountriesbecausesucha

stepwouldhelpstrengthentheirvoice.

Second,theauthorsbelievethatinthefuture,

decision making in the reformed Fund should

notbeblockedbythevetovoteofasinglecoun-

try.10Thisshouldbeafundamentalpartofthe

widerreformdesignedtomaketheFundbetter

reflect theglobalpoliticalandeconomic reali-

tiesofthe21stcentury.

Recently, two documents—the Manuel Report11

(see Box 1) and the report of the Fund’s

IndependentEvaluationOfficeonGovernance

oftheIMF12—havecalledforthecreationofa

ministerial-level governing body, a “Council,”

with a formal role within the IMF structure.

Wefullyagreethatastrongcasecanbemade

in support of the creation of such a Council.

.....................................

7 Forinstance,evenafterconsideringapprovaloftheApril2008quotaadjustments,BelgiumwouldhavealargerquotasharethanBrazilandMexico.Inthesamevein,France,Germany,andtheUnitedKingdomwouldhavelargerquotasharesthanChina,despitethefactthatChina’sshareinworldgrossdomesticproduct(GDP)onapurchasingpowerparity(PPP)basisisequivalenttotwoandahalftimesthatofGermanyandoverthreetimesthoseofFranceandtheUnitedKingdom.

8 Atpresent,quotasarereviewedatleasteveryfiveyears.AreviewtookplaceinJanuary2003.InJanuary2008,noadjustmentsweremade.Adhocquotaincreasestookplacein2006and2008.See:www.imf.org/external/np/exr/facts/quotas.htm.

9 TheHighLevelGrouponFinancialSupervisionintheEuropeanUnion,chairedbyJacquesdeLarosière,alsoprovidesitsownboldideasforreform.

10TheauthorsrecognizethatthiswouldrequireamendingtheArticlesofAgreementtoreducethevotingthresholdforcriticaldecisions,eliminatingvetopowerbyanysinglecountry.Currently,theUnitedStateshasabout16percentofthetotalvotingpowerintheExecutiveBoardandcanthusblockanydecisionrequiringan85percentmajority.WerecognizethatareductionoftheU.S.shareisdifficultsinceitwouldrequiretheassentoftheU.S.Congress,becausetheUnitedStates’participationintheIMFisgovernedbytheBrettonWoodsAgreementAct,notbyatreaty,andwouldthereforerequireactionbybothhousesoftheU.S.Congress.

11TheserecommendationsdrawheavilyontheReportbytheCommitteeonIMFGovernanceReformchairedbyTrevorManuelandwhichincludedGuillermoOrtiz,amemberoftheSteeringCommitteeforthisreport.Thereportisavailableat:http://www.imf.org/external/np/omd/2009/govref/032409.pdf.

12ForthetextoftheIEOreport,see:http://www.ieo-imf.org/eval/complete/eval_05212008.html.

R e fo Rm o f t h e

TheIMFCisanadvisorybodyoftheBoardof

Governorsandhasnolegalweight.Thisunder-

minesitslegitimacyandadverselyaffectsFund

Management’saccountability.Furthermore,the

participation of Fund Governors in the insti-

tution’s affairs is generally modest, except in

timesofsystemiccrisisoronissuesconsidered

of interest for particular reasons. As a result,

thetwice-a-yearmeetingsoftheIMFCdonot

live up to their potential, and therefore their

roleinpromotinginternationalcooperationand

internationalfinancial stability ismodest.Not

surprisingly then, ithasbeen in theG-20and

notintheIMFCwherethemostrelevantrecent

decisionsonconfrontingthecurrentcrisishave

takenplace.

TheIMFArticlesofAgreementalreadypro-

videfortheestablishmentofaCouncilcomposed

of ministers, governors, or persons of compa-

rable rank.TheCouncilwouldprovidestrate-

gic and policy direction to the Fund, discuss

macroeconomicandfinancialpolicycoordina-

tionneeds,andexercisepowersconferredupon

itby theBoardofGovernors.EachCouncilor

wouldbeentitledtocastvotesequalinnumber

to those of the corresponding member of the

ExecutiveBoard.However,aCouncilorrepre-

sentingamulti-countryconstituencywouldbe

free tocast separatevotes for eachcountryof

the constituency—something that cannot be

doneintheBoard.

The Council would establish a continuous

dialoguewithbothFundManagementandthe

Board.ManagementandtheBoardwouldassist

the Council in the definition of the agenda,

whiletheBoardcouldsupportthedefinitionof

prioritiesderivedfromresearchandframepoli-

cydiscussionsintoanactionableformatforthe

Council’sdeliberations.

We strongly believe that for the Council

to be effective and legitimate, its membership

shouldreflectglobaleconomicrealitiesfromthe

momentof its inception.Thus,we fully agree

with theviewexpressed in theTrevorManuel

Reportthat“…wearecallingforafundamen-

tal reform of the IMF’s governance structure,

notamererelabelingofexistingones.Changing

thenameoftheIMFCtotheIMFCounciland

giving it de jure decision making authority is

unlikelytoaccomplishmuch.”13

According to the Fund’s Articles of

Agreement, the size and composition of the

CouncilandBoardneedtomirroreachother.

Therefore, the activation of the Council can

beeffectiveonlyafterstepshavebeentakento

allow an adequate representation of emerging

and developing economies on the Board. We

alsobelieve that representation in theCouncil

shouldbeadjustableovertimeinordertoadapt

toshiftsintherelativeeconomicsignificanceof

theFund’smembers.

Someconcernhasbeenexpressedregarding

theextenttowhichMinistersandGovernorswill

beableand/orwillingtoparticipateinCouncil

meetingsand involve themselves inFundmat-

ters. In our view the logic is totally different.

The creation of the Council would strengthen

the commitment of high-level authorities to

international cooperation. This would banish

theinertiadominatingcurrentIMFCmeetings,

andwhich engenders, as a result, onlyamar-

ginalinvolvementattheministeriallevel.

ActivationoftheIMFCouncilwouldengage

awiderconstituencyatthehighestlevel,involv-

ingalargernumberoftheFund’skeymembers

inthedecision-makingprocessandintheiden-

tification of emerging risks in a timely man-

ner.ItwouldstrengthentheFund’slegitimacy,

.....................................

13Seefootnote11.

25Group oF thirt y

{

{

{

{

R e fo Rm o f t h e

broadensupportfortheFund’smissionamong

itsmembercountries,anddeliverpoliticalcapi-

taltotheFund,enhancingitscapacitytotake

tough positions in its dealings with member

countries when their actions or failure to act

poserisksfortheglobaleconomy.Indeed,this

wouldbeamajorcontributiontotheobjective

ofplacingtheFundatthecenteroftheinterna-

tionalfinancialsystem.

WeareconvincedthatareformofIMFgover-

nanceshouldincludeareviewoftherolesand

responsibilitiesoftheBoardandManagement.

The existing framework, based on a resident

Boardthatisheavilyinvolvedintheday-to-day

runningoftheinstitution,givesrisetooverlaps

infunctionsandprocedures,highcosts linked

totheneedtomaintainalargesupportstafffor

theBoard,politicalconstraintsonstaff’stech-

nical analysis, reduced accountability, and a

slowerdecision-makingprocess.

WesharetheviewthatManagement’sdeci-

sion-making responsibilities in the areas of

surveillanceand resourceallocation shouldbe

strengthened.This implies, in essence,provid-

ingManagementwiththeauthoritytoconduct

surveillance under Article IV of the Articles

ofAgreement,and todevelopandexecute the

annualbudgetsthatallowfortheachievement

of the surveillance mandate, within a medi-

um-term frameworkestablishedby theBoard.

Otheractivities,suchastheappointment,orga-

nization,anddismissalof staff,wouldremain

withFund’sManagement.

Under this arrangement—which should

be implemented only after quotas have been

realigned to reflect current economic realities

and thecompositionof theBoardmodifiedas

suggested above—the Board would serve as

advisor to the Council and formulate propos-

als that could be transformed into decisions

bythelatter.Takingadvantageofthefindings

fromArticleIVconsultations,theBoardcould

deliverregularreportstotheCouncilonissues

deemed important while retaining the right

to ask for discussions of country economies

whenever requestedunder apre-agreedproce-

dure. The Board would continue to decide on

financingarrangementsanddealwithnoncriti-

calactivities,suchasordinaryreviewsofFund

policiesandlendinginstruments.

Theseadjustmentswouldallowa reduction

inthesizeofBoardoffices,withtheconsequent

savings,andevenmoreimportant,theywould

improve accountability at the Fund. As the

IndependentEvaluationOffice(IEO)reporthas

noted,thereisaneedforgreateraccountability

attheIMF:

Accountability is probably the weakest

aspectof IMFgovernance.Thereareno

agreedstandardsagainstwhichtoassess

theactionsof the IMFandnoadequate

mechanisms for the organization to be

held accountable by the membership or

byappropriatestakeholders.14

Indeed, under a more rational division of

responsibilities between Management and the

Board, the latter could devote more energy to

supervise Management’s performance without

the conflict of interest that emanates from the

current delineation of functions. In turn, the

BoardwouldbeheldaccountablebytheCouncil.

.....................................

14Pleasesee:http://www.ieo-imf.org/eval/complete/eval_05212008.html.

The authors of this report are clear that

the interface between the Fund and the pri-

vate sector, in particular the financial sector,

is an important part of the drive to enhance

the accountability of the Fund. We urge the

Managing Director to ensure that a dialogue

between theFund leadershipand thefinancial

sector takes place on a semi-regular basis to

complementtheexistingprocessinvolvingnon-

governmentalorganizations(NGOs).Suchdia-

loguesareadditiveandhelpincreasethegeneral

levelofunderstandingof theFund’sgoalsand

operations, while also providing forums for a

frankexchangeofviews.

ItisalsoimportantfortheFundtostrength-

en its outreach to NGOs. We welcome the

ManagingDirector’sinvitationtoNGOstopres-

entsubmissionsontheworkandreformofthe

IMFattheFund’sIstanbulmeetinginOctober

2009andtrustthatthiswillmarkthebeginning

ofcloserengagementwiththoseorganizations.

We believe the Fund should conduct an open,

merit-based, and transparent process for the

selection of the Managing Director, with the

finaldecisiontakenbytheCouncil.Thisrequires

achangeintheArticlesofAgreement,sincethis

selection is currently the responsibility of the

ExecutiveBoard.TheManagingDirectorwould

continue to chair the Board and would main-

taintheprerogativetoappointthethreeDeputy

Managing Directors. However, this process

should be based on the above-mentioned gen-

eralprinciplesfortheselectionoftheManaging

Director. Inparticular,noneof thesepositions

shouldbeallocatedonthebasisofnationality.

The Fund must have the financial resources

necessary to achieve its short-, medium-, and

long-termgoals.Wenotethatmuchhasalready

beendonetoaddresspreviouslyidentifiedshort-

comings in the levelof resourcesand typesof

facilities available to member countries when

faced with capital flight, balance-of-payment,

orotherfinancialcrises.

The authors acknowledge the timely emer-

gence of close cooperation among the central

banksof themajor industrial countriesduring

therecentfinancialcrisis,andwewelcomethe

supportfortheFunddisplayedbytheG-20coun-

triesattheApril2009LondonSummit,andthe

stepstheytookthereaftertoincreasetheFund’s

financial resources.At that time,G-20 leaders

committedtoincreaseFundlendingresourcesby

approximately US$750 billion. This comprised

US$250 billion in contributions from some

membercountriesthatweretobeaddedtothe

New Arrangements to Borrow (NAB), further

additionsofUS$250billiontotheNABindue

course,ageneralallocation increaseofSpecial

DrawingRights(SDRs)byUS$250billion,and

US$6billion ingold salesby theFund.Many,

butnotall,oftheG-20countrieshavedelivered

onthepledgestheymadeinApril2009.15

It ishardtoimagineafinancialcrisisworse

thantheonethroughwhichtheworldeconomy

is passing, but it could have been worse with-

out thecooperative responseof themajorcen-

tralbanks.TheFundhasalsomadeasignificant

contributiontotheresolutionoftheglobalfinan-

cialcrisisbyoverhaulingitslendingframework,

including the creation of the Flexible Credit

Line, which provides unconditional short-term

financingtocountrieswithwell-managedecon-

omiesthathavesufferedsharpreductionsinthe.....................................

15SeetheIMFwebsite,http://www.imf.org/external/np/exr/faq/sdrfaqs.htm,foranoverviewofthestatusofG-20pledgesregardingIMFresources.

R e fo Rm o f t h e

availability of foreign currency financing from

other sources, such as banks that have sought

toreducetheirexternalexposure.TheFundhas

alsodoubledthenormalaccesslimitsfordraw-

ings on its nonconcessional facilities, modern-

izedconditionalityforallborrowers,enhanced

theflexibilityofitstraditionalstand-byarrange-

ments,andeliminatedcertainseldom-usedfacil-

ities.ItisclearthattheFundhasshownconsid-

erableflexibilityinrespondingtothecrisis.

Thus, member countries and the Fund have

dealtwiththeresourcesandfacilitiesissuesquite

effectively in response to the recent crisis and

should be commended for their action.

Policymakerswillrecallthatpriortotheautumn

of2007,therelevanceof theFundanditsvery

existencewerebeingcalledintoquestion,onthe

spuriousgroundsthatriskwassowellcontained,

was so well managed by private sector actors,

and was so well underpinned by central bank

reservesthattherewasnolongerarelevantmis-

sionfortheFund.Recenteventshaveprovedhow

wrongheadedsuchassessmentsturnedouttobe.

Giventheaboveactions,theauthorsdonot

believethereiscurrentlyaneedtoincreasethe

availabilityoffinancingfortheFund’s lending

facilities,providedthattherecentcommitments

arehonored.Nonetheless,webelievethesetem-

porarymeasuresintroducedtoboosttheFund’s

lending capacity should not undermine the

much-neededincreaseinIMFquotaresources.

FortheIMFtobetrulyregardedasthecentral

institution of the international monetary sys-

tem, itneedsapermanent strengtheningof its

resource base. Therefore, it is fundamental to

ensureaverysignificantincreaseofFundquo-

tasisagreedtoatthe14thquotareview.

Looking still further ahead, an assessment

byanappropriategroupofthefuture,perhaps

broader,roleofSDRscouldalsoproveuseful.16

.....................................

16LeadersofanumberofFundmembercountrieshaveraisedthematterofthefutureroleofSDRs.Today,SDRsperformonlyalimitedroleinglobalreserves.Theirpresentuseisconfinedchieflytotransactionsbetweenthecentralbanksofmembercountries.Theearlyattempts tocreate functioningmarkets forSDR-denominatedclaimswerenot successful.Their future role,however, isamatterofconsiderableinterestamongeconomistsandsomecountries’officials,anditmaybetimetoconsidertheregularresumptionofSDRallocations.Clearly,manystepswouldhavetobetakenforSDRstobecomeawidelyacceptedmediumofexchangeandstoreofvalueintheofficialandprivatesectors.Thissubject,however,canbeconsideredonlyinthecontextofacomprehensivestudyconcernedwiththelong-termevolutionoftheinternationalmonetarysystem,amatterthatliesbeyondthescopeofthisreport.

29

R e fo Rm o f t h e

Thefinancialcrisisanddeeprecessionthatgrippedtheglobaleconomyin2009tes-

tifytotheneedforchangesinmacroeconomicpoliciesandfinancialsectorsupervi-

sioninindividualcountriesandfortheintensificationofsurveillancebytheIMF.

thestafffromvisitingindividualcountriesoften

enoughtodetectemergingeconomicproblems

orweaknessesinthefinancialsector.

Second, the Fund’s Executive Board cannot

review the staff reports with adequate knowl-

edge of the country under consideration—

knowledgesufficienttojudgethequalityofthe

staff report. For this reason, the attendance

at Board meetings devoted to the discussion

of the staff reportshasbeenabysmally low.A

recentreviewofIMFSurveillancebytheFund’s

Independent Evaluation Office notes that, on

average,onlynineofthe24ExecutiveDirectors

or theirAlternatesattendBoarddiscussionsof

individualsurveillancereports;therestarerep-

resentedbymembersoftheExecutiveDirector’s

staff.Thiscontrastswithanaverageattendance

of15DirectorsorAlternatesatmeetingsdevot-

edtobroadpolicyissues.

Third,theFund’sbilateralsurveillance,ascon-

ductedthroughtheFinancialSectorAssessment

Program (FSAP) process, has focused on the

architecturalstructureofsupervisionandover-

sight and not on current developments in the

financialmarkets thatmayposemajorsystem-

ic risks and threaten economic stability in the

future.Thisweaknessmustbeaddressed.

While the FSAP process should continue,

regular surveillance reports shoulddevote less

attentiontothestructureofsupervisionanda

review of past problems and policies. Instead,

theyshouldfocussharplyoncurrentandpro-

spectiveproblemsandon thepolicies adopted

orproposedtodealwiththem,includingfinan-

cialsectorissues.Thesemattersshouldreceive

closeattentionbytheFund’scommitteecharged

Put simply, it is not enough for effective sur-

veillance by the Fund to identify potential

risks,asithasdoneinsomecases,eitherinits

Global Financial Stability ReportsoritsWorld

Economic Outlook, its two flagship publica-

tions.TheFundmustbeabletomovefromsur-

veillancetoactionwhenevereconomicorfinan-

cialstabilityaredeemedtobeatrisk.

TheauthorsbelievethatmoresupportofFund

managementbyitsmembershipisrequired,both

toexertpeerpressurewheneveracountry’spoli-

ciesbegintofollowariskypath,andtofosterthe

conduct of national economic policies with

greaterawarenessoftheneedforinternational

cooperation. If these conditionsweremet,use

ofexistingsupplementaryproceduresthatopen

thedoor for informal and confidentialdiscus-

sions,orevenforadhocArticleIVConsultations,

wouldbecomemorefeasible.

In the past, IMF staff teams have visited

each member country periodically and issued

adetailedreporttobeexaminedbytheFund’s

Executive Board. This process is perhaps suf-

ficient to identifyweaknesses in theconductof

nationaleconomicpolicies,includingthoseper-

tainingtothesupervisionofthefinancialsector.

AtarecentG30meeting,onememberfamiliar

withhiscountry’ssurveillancereportsaidthatit

was“undoubtedlythebestexternalreportweget

onoureconomy.”Yetthequalityofthereports,

bythemselves,doesnottellthewholestory.

There are three serious weaknesses in the

surveillance process that must be addressed.

First,thehugemembershipoftheFundprevents

withreviewingsurveillancereportsandbythe

management.

A thorough and timely form of oversight is

required for systemically important countries,

including,mostimportantly,surveillanceoftheir

financialsectors,andtheirinstitutionalarrange-

ments for theconductoffinancial supervision.

Tothisend,theFund’sManagingDirectorpro-

posed a streamlined approach to country sur-

veillance,andtheproposalwasadoptedbythe

ExecutiveBoard.TheFundnolongerundertakes

annualsurveillanceofmanymembercountries,

especially small, stablecountries; ithasmoved

insteadtobiennialsurveillanceoverthosecoun-

tries’ economies and policies. Furthermore, it

hasreducedthecoverageofsurveillancetofocus

onmattersofcentralconcern to theFundand

pays closer attention to financial and balance-

sheetvulnerabilities,whichhaveplayedamajor

roleinmostemerging-marketcrises,andinthe

current global crisis, which originated in the

UnitedStates,anadvancedindustrialcountry.

Most important, the Managing Director

has proposed that more emphasis be given to

theoriginalaimofsurveillance—assessingthe

consistency of a country’s exchange rate and

macroeconomic policies with national and

international stability. We would add that the

Fund should pay closer attention to the con-

sistency between its members’ exchange rate

regimesandtheirobservableexchangeratepoli-

cies.UnderArticleIVoftheFund’sArticlesof

Agreement,eachmembercountryhastheright

tochooseitsownexchangerateregime,butthe

Fund is required to exercise firm surveillance

overitsmembers’exchangeratepolicies.Thisis

thelegalbasisfortheFund’ssurveillanceofits

membercountries.17

At this juncture,moreover,whenmanygov-

ernments are running very large fiscal deficits

andincurringhugeamountsofdebt, including,

insomecases,foreigncurrencydebt,theFund’s

surveillance of those members must assess the

sustainabilityoftheirfiscalsituationsand,where

appropriate, theirmedium-termplans tomain-

tain or restore debt sustainability. The Fund

should provide reassurance where appropriate

butofferfrankexpressionsofconcernwhenever

a country’s fiscal situation raises doubts about

debt sustainability. If Fund surveillance is not

forwardlooking,itisoflittleusetothegovern-

mentofthecountryinvolvedortotheFunditself.

Inadditiontoexercisingregularsurveillanceof

itsmembers’economiesandeconomicpolicies,

theFund,togetherwiththeWorldBank,admin-

istersanFSAP,inwhichFundandBankstaffs,

joinedbyoutsideexperts,undertakeacompre-

hensivereviewofamembercountry’sfinancial

system.Theresultsareconveyedtothecountry’s

government, along with a report on the coun-

try’sobservanceoftherelevantfinancial-sector

standardsandcodes(ReportontheObservance

ofStandardsandCodes,ROSC),andaFinancial

Sector Stability Assessment (FSSA), in which

Fundstaffaddressissuesofparticularrelevance

to IMF surveillance, including risks to macro-

economic stability stemming from a member’s

financial sector, and the sector’s capacity to

absorbmacroeconomicshocks.

We underscore the general usefulness of

theFSAPprogram,theROSCreview,andthe

.....................................

17Theactualexchangeratepoliciesofsomemembers,includingsystemicallyimportantcountries,candiffersubstantiallyfromthoseonewouldassociatewiththeirdeclaredexchangerateregimes.TheManagingDirectorandstaffmustbepreparedtoaddresscasesinwhichacountry’sstatedexchangerateregimedifferssubstantiallyfromitsactualpractice.TheFund’sstaffanditsmembercountriesshouldbewillingtodiscussthesemattersfranklyandaddresstheproblemstheyraiseratherthanengageincircuitousdebatesthatavoidthefundamentalissues.

R e fo Rm o f t h e

FSSAs,butwealsorecognizecertainareasfor

improvement. Given the tumultuous events

that have gripped national and international

financialmarketsduringthe last twoyears, it

has become clear that the FSAP, ROSC, and

FSSAreviewsmustendeavortoidentifyweak-

nesses in the oversight of national financial

sectors, and the Fund should strengthen the

reviews, and member countries should pay

closeattentiontotheirconclusionsandacton

theirrecommendations.

More than half of the Fund’s members

have participated in the FSAP program. We

note with concern, however, that as of the

end of August 2009, a number of significant

G-20 countries have yet to complete an FSAP

(including Argentina, China, Indonesia, and

the United States). The failure of countries to

participatefullyintheFSAPprocessisperhaps

symptomaticofatendencybymajorstakehold-

erstoavoidFundsurveillance.Inthecaseofthe

United States’ historic refusal to submit to an

FSAP,observerslongsuspectedthatthiswasin

partbecausetheyknewwhattheFSAPreport

wouldsay:thattheAmericansystemoffinan-

cial supervision was not coherent and had to

befixed.Forinstance,thereareatleast54dif-

ferent supervisorsofbanks,50of themat the

state level, fourat the federal level.Eachstate

hasitsowninsuranceregulatorandthereisno

national regulator. The supervisory overlaps,

gaps, and failings have been recognized for

sometimeandareaddresseddirectlybyaG30

report.18Wethereforewelcomethedecisionto

participate in theFSAPprogramand theU.S.

government’splantoreformtheU.S.systemof

prudentialsupervision.

We note that many financial sector assess-

mentsweremadeseveralyearsago.Sincethere

mayhavebeensignificantchangesinthefinan-

cial sectors of the countries concerned, in the

waytheyaresupervised,andintheregulatory

frameworks, those countries should be the

objectofnewassessments.TheFundisurgedto

conductnewFSAPsandFSSAswherenecessary

andappropriate.

Theauthorsbelievethatthebilateralsurveil-

lanceundertakenasArticleIVreviewsandvia

the FSAP are essential tools, but they are not

sufficient to get the surveillance job done. As

we have noted, FSAPs address structural and

institutionalmattersandtakeplaceveryinfre-

quently.TheArticleIVmissionsareingeneral

morefocusedonvulnerabilitiesand,therefore,

onwhatmaygowrong,butthesemissionstake

place at most once a year. When appropriate,

thetwoprocessesoffinancialsystemreviewand

analysisshouldbelinked.IfanFSAPidentifies

weaknessesintheapplicationormaintenanceof

internationalstandardsandcodes,theseshould

betackledinasubsequentArticleIVreviewand

addressedviacorrectiveactionsundertakenby

themembercountry’sauthorities.

Tobemoreeffective,theFundmustequipitself

toconductassessmentstodetectvulnerabilities

and the build-up of risk on a near-continuous

basis, in the financial sector or elsewhere. At

thisjuncturenooneknowsjustwherethenext

crisiswilldeveloporwhatmighttriggerit.We

cannotjudgewhetherthecrisiswillemergefrom

the core of the financial system, from a fiscal

or debt crisis, from an old-fashioned balance-

of-payments and inflation crisis, or from some

othersource.

The authors are clear that the Fund must

be constantly vigilant in performing this sur-

veillance role. Part of the Fund’s real ana-

lytical value shouldbemeasuredby its ability

.....................................

18SeeThe Structure of Financial Supervision: Approaches and Challenges in a Global Marketplace,GroupofThirty,2008.

to identify future systemic risks in financial

markets, nationally, regionally, and globally.

Havingshedlightontherisks,theFundought

tobesupportedinthecrucialtaskofwarning

membercountriesofthedangersaheadandin

theequallyimportantbutverydifficulttaskof

pressingmemberstopayattentiontothemes-

sageandactontheconsideredadviceofferedin

goodfaith.

Whateverthecasemaybeforeachindividual

membercountryorgroupofcountries,theFund

mustenhanceitscapabilityanddowhateverit

takes togetaheadof thecurveona real-time

basis, includingretainingadditional staffwith

thedesiredmixofskillsandabilitiesspecificto

thecomplextaskofreal-timeanalysesofemerg-

ingrisks.

Tothatend,theauthorsbelieveitisimpor-

tantfortheFundtostrengthenthecapacityofits

stafftoaddressaspectsofsurveillancerelatedto

thefunctioningofcomplexandrapidlyevolving

financialmarketsandinstruments.Suchworkis

insomedegreeseparatefromandcomplementa-

rytoothersurveillancerolesandmayrequirea

focusedriskassessmentprocess,usingdifferent

methodsandapproachesandnecessitating the

developmentofafinancialintelligencenetwork

thatcandealwithrapidlychanginginformation

onacontinuousbasis.Toofewmembersofits

staffmaybethoroughlycompetenttomonitor

the functioningof countries’ financial systems

or their institutional arrangements for finan-

cial supervision. Many of the Fund’s staff are

macroeconomistswhosetrainingmaynotfully

equip them to assess the quality of financial

supervision in member countries. Those who

havetherequiredskills,moreover,typicallyseek

employmentinthefinancialsectoritself,notin

institutions such as the Fund, concerned with

oversightof the sector.Given thecentralityof

surveillanceforthefunctioningoftheFund,the

necessaryresourcesandeffortmustbedevoted

totherecruitmentofstaffthatcanaddressany

suchlackintheFund’sinstitutionalcapacityto

continuously assess financial markets and the

systemicrisksthatmaygerminatefromwithin

majoreconomiesandfinancialmarkets.

In2006,theFundexpandeditssurveillancein-

struments and launched a new supplementary

consultationprocedureinamultilateralformat.

This so-called multilateral consultation would

bringtogetherrepresentativesofkeycountries’

governments toagreeoncommonordifferen-

tiated actions aimed at resolving a major in-

ternational economic problem. There is much

need foraprocessof this sort, exemplifiedby

the problem of global imbalances, which re-

quired—andstillrequires—mutualadjustments

intheeconomicpoliciesofthesystemicallyim-

portantcountriesdirectlyinvolved.

The first round of these new consultations,

however, disappointed those who held high

hopes for theprocess.After the IMF’s recom-

mendationsdescribedonpage19ofthisreport

were made, each participating country listed

thepolicychanges itwaspreparedtomake in

ordertoreduceglobalimbalances,butmostof

those changes reflecteddecisions the countries

hadalreadytakenunilaterallyorwerecommit-

ted to take, rather than new commitments to

oneanother.Thusweagainseethetendencyof

membercountriestoavoidfrankexchangesand

instead toprovide formulaicanswers topress-

ingissuesrequiringnewpolicymeasures.

This experience suggests that multilateral

consultationisunlikelytobeproductiveunless

theFundtakestheinitiative.TheFundshould

propose specific policy recommendations to

R e fo Rm o f t h e

each participating country in advance of the

actual consultations.Thiswouldcompel them

tofocusonapackageofmutuallyconsistentpol-

icyadjustmentsthattheymightbereluctantto

proposeontheirown.Furthermore,theFund’s

subsequentreportontheconsultations,includ-

ing the participants’ responses to the Fund’s

proposals,shouldbediscussedbytheExecutive

Board and the International Monetary and

FinancialCommittee (IMFC),andasummary

shouldbepublishedthereafter.19

Itmustbenoted,moreover,thattheproblem

ofglobalimbalanceshasnotyetbeenresolved

and is apt to reemerge as the world economy

recoversfromthecurrenteconomiccrisis.There

willthenbeneedforanewroundofmultilat-

eral consultation involving the United States,

China, and other major countries. That new

round of consultations should be conducted

inthemannerdescribedabove,withtheFund

making explicit recommendations to the

participating governments. The particular

recommendations, whether they concern, for

example,theappreciationoftherenminbi20or

areductionintheU.S.fiscaldeficitaseconomic

recoverytakeshold,areamatterfortheFund.

The authors are clear that to be credible and

commandmorerespectandlegitimacy,themul-

tilateralsurveillancerecommendationsmustbe

direct and focused squarely on the matters of

greatestconcern.

Finally, we take this opportunity to praise

theworkoftheFund’sstaffandthepublications

forwhichitisresponsible,especiallytheGlobal

Financial Stability Reportandthesemiannual

World Economic Outlook, which are surely

among thebest sources forauthoritative com-

mentaryonthestateoftheworldeconomy.

.....................................

19Ifanotherrecommendationmadeaboveisadopted(activationoftheCouncilforwhichprovisionismadeintheFund’sArticlesofAgree-ment),theFund’sreportoneachmultilateralconsultationshouldbetransmittedtotheCouncil,sincetheIMFCwouldhaveceasedtoexist.

20TheissueofthevalueoftherenminbiisalreadybeingaddressedbilaterallyviatheU.S.-ChinaDialogue,butthisdialoguedoesnotprecludetheFundtakingarobuststanceonthematter.

35

R e fo Rm o f t h e

TheFundmustcoordinateandcollaboratewithotherinstitutionsengagedinmat-

tersoffinancialsupervisioninacloseandproductivemanner.Manyobservershave

stressedtheneedfortheFundtoworkcloselywithotherdiverseforumsandinstitu-

tions,includingtheG-20,theWorldBank,theBankforInternationalSettlements,

national governments, and central banks. We strongly encourage linkages that

enhanceinformationflowandcollectiveendeavors.Wenotethedistinctionbetween

fora (suchas theFSB),whichmeetperiodicallyanddrawgenerallyuponnational

authoritiesandoutsideresourcesintheirwork,andthoseinternationalinstitutions

(suchastheFund),withadistinctseparatemandate,legalpersonality,andpermanent

resourcebase.Webelievethatthereisaneedforacarefulbalanceintherespective

rolesofthetwotypesoforganizationsaseachhasrelativestrengthsandweaknesses.

collaboration and coordination are effective

and,insofarasworkable,inclusive.

Theauthorsof this reportbelieve theFund

must ensure a particularly close collaboration

betweenitselfandtheFinancialStabilityBoard

(FSB),aprocessthatwasbegununderitsprevi-

ousname,theFinancialStabilityForum(FSF).21

OnApril2,2009,theG-20leadersDeclaration

replacedtheFSFwiththeFSB,which,inaddi-

tiontoanexpandedmembership,wasprovided

withamuchbroadermandate.22

WewelcometheG-20’sdecisiontoenhance

theroleoftheFSB.Itistaskedtoperformakey

functionasregardstherebuildingandredesign

Going forward, the Fund must equip itself

toconductglobalfinancialsurveillanceaimed

atdetectingunsustainabledevelopmentsinthe

financialmarketsofmajoreconomiesandissu-

ing confidential warnings to financial super-

visors in those countries. Within the G-20

framework,aslaidoutintheApril2009work

program,itishopedthatforthrightearlywarn-

ings by the Fund may help to raise concern

among supervisors regarding financial devel-

opments, especially in systemically important

member countries, such as the United States

andChina.This canonlybeachieved ifpoli-

cymakers ensure that the mechanisms for

.....................................

21JointletterfromtheManagingDirectoroftheIMFandtheChairmanoftheFSBtoFinanceMinistersandCentralBankGovernormembersoftheG-20,November13,2008.ThelettersetsouttheproposeddivisionoflaborandtherolesandresponsibilitiesbetweentheFSFandtheIMF.However,thedivisionofresponsibilitiesinthejointletterisdifferentfromthatsuggestedbytheG-20DeclarationofApril2,2009(seefootnote22).TheG-20givesthemajorroleinfinancialsectorsurveillancetotheFSB,whilethejointletteragreesthatfinancialsectorsurveillanceshouldbeundertakenbytheFund.

22G-20,DeclarationonStrengtheningtheFinancialSystem,London,April2,2009.TheFSBmandateincludesthefollowingroles:toassessvulnerabilitiesaffectingthefinancialsystem;toidentifyandoverseeactionneededtoaddressthem;topromotecoordinationandinformationexchangeamongauthoritiesresponsibleforfinancialstability;tomonitorandadviseonmarketdevelopmentsandtheirimplicationsforregulatorypolicy;toadviseonandmonitorbestpracticeinmeetingregulatorystandards;toundertakejointstrategicreviewsofthepolicydevelopmentworkoftheinternationalStandardSettingBodiestoensuretheirworkistimely,coordinated,focusedonpriorities,andaddressinggaps;tosetguidelinesfor,andsupporttheestablishment,functioningofandparticipationin,supervisorycolleges,includingthroughongoingidentificationofthemostsystemicallyimportantcross-borderfirms;tosupportcontingencyplan-ningforcross-bordercrisismanagement,particularlywithrespecttosystemicallyimportantfirms;andtocollaboratewiththeIMFtoconductEarlyWarningExercisestoidentifyandreporttotheIMFCandtheG-20FinanceMinistersandCentralBankGovernorsonthebuild-upofmacroeconomicandfinancialrisksandtheactionsneededtoaddressthem.

oftheglobalsystemoffinancialstandardsand

therelatedmodesofcooperationamongnation-

alcentralbanks,supervisors,andministriesof

finance.TheauthorshopethatanenlargedFSB

willcontinuetoprovideaforuminwhichfrank

discussionsandexchangesofviewsarepossible.

Ultimate responsibility for financial stability

must,ofcourse,residewiththefinancialsuper-

visors of individual countries, but we expect

thattheenlargedBoardwillfacilitatecommu-

nicationinnormaltimesanddevelopthechan-

nelstospeedcommunicationintimesofcrisis.

TherolesoftheFundandFSBshouldbecom-

plementaryandenhanceeachinstitution’sabil-

itytoachieveitsrespectivemandate.23Withits

universalmembership,theFundhasacapacity

todrawsynergiesfromitsmultilateral,region-

al,andbilateralsurveillanceactivities;integrate

financial sector assessments with macroeco-

nomicstabilityanalyses;adaptitspolicyadvice

totheneedsandcircumstancesofeachcountry;

andcloselymonitorandevaluatepolicyimple-

mentation.24TheFSB, inturn,bringstogether

senior national policymakers and key interna-

tional supervisory and regulatory institutions

andcentralbanks,aswellasinternationalstan-

dardsetters,givingitauniquecapacitytogive

impetus to and facilitate coordination among

thesebodies,especiallyintheareaoffinancial

sectorregulation.

WestressthattheFund’smembercountries

and G-20 policymakers must strive to avoid

institutionaloverlapandduplicationofrespon-

sibilitieswhenundertakingtheredesignof the

architecture of international coordination and

relatedstandard-settingroles.Itisofnotethat

the IMF and FSB mandates pose overlaps of

responsibilitiesthatcouldgiverisetoproblems.

Firstare thehighcostsofoperationsnotonly

fortheinstitutionsthemselves,butalsoforthe

nationalfinancialauthoritiesthatprovidetheir

inputs to both organizations. Second, having

two institutions charged with the same func-

tionscouldleadtodifferentdiagnoses(andpos-

siblypolicyrecommendations),withtheassoci-

atedproblemofmakingithardertoconvergeto

commonproposals.

Theserisksimplytheneedforacleardelinea-

tionofworkbetweentheFundandtheFSBgiv-

entheneedfortheeffectiveimplementationof

financialsurveillance,bothcurrentlyandinthe

future.Theauthorsofthisreportbelievethat,

inparticular,theIMFasaninternationalfinan-

cialorganizationwouldbebestplacedtomake

an objective assessment of countries’ finan-

cial vulnerabilities, through its surveillance of

financial conditions in member countries and

globally.Suchsurveillancecouldbeconducted

injointmissionswithFSBmembers(that isto

say,supervisorsofdifferenttypes),underFund

leadership.

Toensurecomityastorespectivecompeten-

ciesandresponsibilities,theauthorsofthisreport

urge the leadership of the G-20, the FSB, and

the IMF tonegotiate a detailedMemorandum

of Understanding (MoU) that would draw on

earlieragreementsbetweenthetwoinstitutions

andlayouteachinstitution’srole,theirrespec-

tive responsibilities, and the type of coordina-

tionmechanismproposedfornormaltimesand

duringcrises.Ifthisisnotdone,ambiguityover

thewaysinwhichtheFundandtheFSBcoor-

dinateandcollaboratemayweakenratherthan

strengthentheinternationalsystem......................................

23InEurope,thecallforeffectivecoordinationbetweentheIMFandtheFSF/FSBandtheneedforthecarefuldivisionofresponsibilitiesasregardssurveillanceandthemonitoringofsystemicriskhasbeenledbytheHighLevelGrouponFinancialSupervisionintheEU,chairedbyJacquesdeLarosière.See“ChapterIV:OnGlobalRepair,”pages59–68,at:http://ec.europa.eu/internal_market/finances/docs/de_larosiere_report_en.pdf.

24IMF,TheFund’sResponsetothe2007–08FinancialCrisis—StocktakingandCollaborationwiththeFinancialStabilityForum,Sep-tember15,2008.

39

R e fo Rm o f t h e

Therevisionshouldenhancetheinfluenceof

emerginganddevelopingcountries.

In the future, amechanismof automatic

quota adjustments every four years should

be introduced, so that any changes in the

globaleconomyarereflectedrapidlyinquota

shares. Similarly, the quota formula should

bereviewedand ifnecessaryadjustedevery

eightyears.

Further,nosinglecountryshouldretaina

vetooverFunddecisions.

and

replace the International Monetary and

FinancialCommittee(IMFC).

TheCouncilmustbeempoweredtotake

strategicpolicydecisionsandtotakethenec-

essarystepstofosterpolicycoordination.

TheCouncilmustalsobe empowered to

foster and monitor the implementation of

Fund recommendations aimed at maintain-

ingeconomicandfinancialstability.

TheCouncil should exerciseoversightof

theFund’sExecutiveBoardandManagement.

The Council should initiate multilateral

consultations aimed at reaching agreement

amongtheparticipatinggovernmentsonpol-

icyresponsestomajoreconomicproblems.

In the future, the Board should focus

moreonstrategicmattersand leaveday-to-

day operational matters to the Managing

Directorandstaff.

The respective responsibilities of the

ExecutiveBoardandManagementshouldbe

reviewedwiththeaimoflimitingtheBoard’s

involvementinroutinematters,reducingthe

frequencyofBoardmeetings,andimproving

attendanceatthosemeetings.

Inparticu-

lar, none of these positions should be allo-

catedonthebasisofnationality.

Recent commitments

include the creation of the Flexible Credit

Line,thesignificantenhancementstopoten-

tial financing through the issue of Special

DrawingRights(SDRs),theexpansionofthe

New Arrangements to Borrow (NAB), and

the development of Fund borrowing agree-

mentswithindividualmembercountries.

Therefore, it

isessentialthatFundquotasincreasesignifi-

cantlyinthe14thquotareview.

Initsregularsurveillanceofitsmembers,

the Fund should give close attention to the

sustainabilityoftheirfiscalpoliciesandrisks

to economic and financial stability arising

fromthem.TheFundmustgivecandidadvice

toamembercountrywhenitdetectsserious

riskstoeconomicandfinancialstability.

Governmentsshouldbeobligedtorespond

promptly to those recommendations. Their

responses and any failure to act should be

considered by the Executive Board when it

reviewstheirsurveillancereports.

The Fund should monitor

theirprogressincomplyingwiththerecom-

mendations made in the FSAP, and related

ROSCandFSSAreports,notingtheprogress

madeintheirimplementationbutidentifying

remainingweaknesses.

The FSAP report should be made public

soon after its completion. Members whose

FSAP reports were completed several years

agoshouldinvitenewreviewoftheirfinan-

cial systems.Lackofadherence toaccepted

international financial standards should be

identified and subsequent recommendations

includedinArticleIVreports.

Thenext

crisismaytakeplaceinthecoreofthefinan-

cialsystem,butitcouldjustaswellbeafis-

calordebt crisis,orabalance-of-payments

andinflationcrisis.Whateverthecause,the

Fundmustenhanceitsabilitytodowhatever

ittakestogetaheadofthecurveonareal-

timebasis.

TheManagingDirector,advisedby

hisorherstaff,shouldbeauthorizedtoissue

suchwarningswhendeemednecessary.The

Fund must be able to act as a trusted con-

fidential adviser. However, in the interests

oftransparency,theFundmustbalancethis

rolewiththeneedtoultimatelymakeitsrec-

ommendationspublic.

Todealwithits increasedresponsibilities

relating to surveillance and the identifica-

tion of systemic risks to the global econo-

my,theFundshouldrecruitadditionalstaff

withexpertiseinthefunctioningofcomplex

financialmarketsandproducts.

R e fo Rm o f t h e

The MoU should delineate respective

responsibilitiesandrolesasregardsfinancial

stability, monitoring the global economy,

and early warning of future systemic risks.

Careshouldbetakentoavoidduplicationof

tasks or responsibilities, and to ensure that

thesurveillanceoffinancialrisksinmember

countriesandglobally ispartof theFund’s

surveillanceresponsibilities.

Jointmissionsof theFundandmembers

of theFSBcouldwellbeveryuseful in this

context.

43

R e fo Rm o f t h e

Policymakersthroughouttheworldhaverecognizedtheneedtostrengtheninter-

nationalcoordinationandthepolicyresponsesandmechanismsdesignedtounder-

pinfinancialstability.TheextensiveG-20workprogramadoptedinApril2009

makesthedegreeofconsensusabundantlyclear.Governmentshaveunderscored

the key role thatmust be playedby the InternationalMonetaryFund (IMF) in

resolvingfinancialcrisesandhelpingtoensurethemaintenanceofamoredurable

degreeoffinancialstabilityinthefuture.Toachievethatgoal,theIMFrequires

robustreform,especiallywithregardtothelevelofpoliticalleadership,itssystem

ofgovernance,andtheconductofbilateralandmultilateralsurveillance.

TheneedforgovernancereformsintheFund

iswellestablished.Thegovernancereformswe

identifymustbeundertaken to strengthen the

legitimacy of the institution and to ensure it

better reflects evolving political and economic

realities.ActiontoactivatetheCouncil,adjust

quotas, change the makeup of the Executive

Board,andstrengthentheFund’sresourcebase

allrequiretheleadershipoftheG-20andother

member countries to desist from a defense of

entrenched positions and a recognition of the

benefitstoallthatwouldaccruefromareinvig-

oratedFundwithenhancedpoliticalandinsti-

tutionalcredibility.

Theauthorsarealsoclear in thebelief that

theFundmustcontinuetoplayacentralrolein

asystemofenhancedbilateralandmultilateral

surveillance of member countries’ policies and

actionsthatisdesignedtoidentifytrends,risks,

weaknesses,andstrainsinthenationalandglob-

alfinancialsystem.TheFundmustbesupported

bymembercountries in these surveillanceand

earlywarning tasks.When required, countries

shouldbepressedbytheCouncilandleadership

Themembers of theG30’sWorkingGroup

onIMFreformareconvincedthatthereforms

recommendedareessentialtoaddresstheprob-

lems revealed by the recent global financial

crisis,theeffectsofwhichcontinuetoreverber-

ate, damaging thefinancial systemandglobal

economicperformance.Weregardthereforms

to be a necessary part of the global policy

response. However, we are concerned by the

factthatprogressinthedifferentareasofFund

reformisuneven.Inthisregard,weweredisap-

pointed to see that the Communiqué of G-20

FinanceMinistersandCentralBankGovernors

ofSeptember4–5,2009,doesnotexplicitlyrefer

to the need for a substantial quota increase.

Furthermore,verylittleprogresshasbeenmade

on the issueof governance reformat the IMF

and, despite G-20 leaders’ recognition of the

needforanopen,transparent,andmerit-based

processfortheselectionofFund’smanagement,

weare stillwaiting for theconcrete rules that

will guide thisprocess.The taskof reforming

theFundisnoteasy,itwillnotbesimple,and

therearemanybarrierstoreform,butthework

mustbedone.

oftheFundtotakeremedialmeasurestocorrect

problemsthathavebeenidentified.

Finally, the Fund must coordinate closely

andeffectivelywithotherinternationalinstitu-

tions,inparticularwiththeFinancialStability

Board. This key relationship must be formal-

izedandclarifiedthroughthenegotiationofa

Memorandum of Understanding. Roles must

beclearandrespectiveresponsibilitiesmustbe

appropriatetoeachactor’scapabilitiesandhis-

toricstrengths.

TheGroupofThirty’srecommendationsfor

reform of the IMF are being conveyed to the

membersoftheFund,theleadershipoftheG-20,

andotherinterestedparties.Wecalluponthem

toimplementtherecommendationsasamatter

ofurgencyandurgethattherecommendations

be considered by the Fund’s membership and

underpinarenewedcommitmenttoact.Wecall

onmembersof theFund to adopt a timetable

fortheimplementationofthenecessaryreforms

atits2010springmeetinginWashington,D.C.

A final word: the Fund is not an organiza-

tionseparatefromitsmembers.Ifthemembers,

especially the leading countries in the global

economy, are not willing to take the Fund’s

surveillance seriously, no amount of improve-

mentinthequalityofsurveillancewillmakea

majordifferencetothefunctioningoftheglobal

economy.ItisuptothemembershipoftheFund

to ensure that the Fund can play the role in

theglobaleconomythatithasrepeatedlybeen

asked toplay—arole that this report strongly

supports.

47

GeneralManager,BankforInternational

Settlements

FormerCounsellor,InternationalMonetary

Fund

FormerGovernor,BancodeEspaña

FormerChairman,BaselCommittee

onBankingSupervision

ChairmanandCEO,DFCAssociates,LLC

FormerMinisterofEconomy,Argentina

ManagingDirector,GoldmanSachsGroup,

Inc.

FormerPresident,FederalReserveBank

ofNewYork

DirectorandMemberoftheExecutive

Committee,GrupoSantander

FormerDeputyManagingDirector,

BancodeEspaña

FormerSecretaryofState,Ministry

ofEconomyandFinance,Spain

Governor,Bancad’Italia

Chairman,FinancialStabilityBoard

MemberoftheGoverningandGeneral

Councils,EuropeanCentralBank

FormerViceChairmanandManaging

Director,GoldmanSachsInternational

ChairmanoftheBoardofTrustees,

GroupofThirty

Chairman,PresidentBarackObama’s

EconomicRecoveryAdvisoryBoard

FormerChairman,BoardofGovernors

oftheFederalReserveSystem

ChairmanandCEO,GroupofThirty

FormerGovernor,BankofIsrael

FormerCounselor,DirectorofResearch,

InternationalMonetaryFund

ExecutiveSecretary,GroupofThirty

President,GeoffreyBell&Company,Inc.

DeputyChairman,PlanningCommission

ofIndia

FormerDirector,IndependentEvaluation

Office,InternationalMonetaryFund

Chairman,ArabFundforEconomic

andSocialDevelopment

FormerMinisterofFinanceandMinister

ofPlanning,Kuwait

Professor,WarsawSchoolofEconomics

ChairmanoftheBoard,Bruegel

FormerPresident,NationalBankofPoland

FormerDeputyPrimeMinisterandMinister

ofFinance,Poland

*MembersasofAugust31,2009.

R e fo Rm o f t h e

ProfessorofEconomics,HarvardUniversity

PresidentEmeritus,NationalBureauof

EconomicResearch

FormerChairman,CouncilofEconomic

Advisers

PresidentandCEO,TIAA-CREF

FormerChairman,SwissReAmericaHolding

Corporation

FormerViceChairman,BoardofGovernors

oftheFederalReserveSystem

Governor,BankofIsrael

FormerFirstManagingDirector,International

MonetaryFund

FoundingPartner,GáveaInvestimentos

ChairmanoftheBoard,BM&F-Bovespa

FormerGovernor,BancoCentraldoBrasil

MemberoftheBoardofDirectorsandSenior

Advisor,RHJInternational

FormerManagingDirectorandMemberofthe

AdvisoryBoard,Lazard&Co

FormerCounsellorandDirector,International

MonetaryFund

FormerManagingDirector,DresdnerBank

ViceChairmanoftheGoverningBoard,Swiss

NationalBank

FormerPartner,MooreCapitalManagement

Governor,BankofEngland

FormerProfessorofEconomics,London

SchoolofEconomics

ProfessorofEconomics,WoodrowWilson

School,PrincetonUniversity

FormerMember,CouncilofEconomic

Advisors

Governor,BancodeMexico

ChairmanoftheBoard,BankforInternational

Settlements

FormerSecretaryofFinanceandPublicCredit,

Mexico

Chairman,PromontoryEurope

FormerMinisterofEconomyandFinance,

Italy

FormerChairman,InternationalAccounting

StandardsCommittee

FormerMemberoftheExecutiveBoard,

EuropeanCentralBank

FormerChairman,CONSOB

ThomasD.CabotProfessorofPublicPolicy

andEconomics,HarvardUniversity

FormerChiefEconomistandDirectorof

Research,IMF

MinisterofFinance,Singapore

FormerManagingDirector,Monetary

AuthorityofSingapore

Director,NationalEconomicCouncil

FormerCharlesW.EliotUniversityProfessor,

HarvardUniversity

FormerPresident,HarvardUniversity

FormerU.S.SecretaryoftheTreasury

President,EuropeanCentralBank

FormerGovernor,BanquedeFrance

SeniorAdvisor,MorganStanley

International,Inc.

FormerChairman,MorganStanley

International,Inc.

FormerChairman,Securitiesand

InvestmentsBoard,UK

Governor,People’sBankofChina

FormerPresident,ChinaConstructionBank

FormerAssistantMinisterofForeignTrade

FormerDeputyGovernor,BankofJapan

FormerChairman,EuroCurrencyStanding

Commission

Director,YaleCenterfortheStudy

ofGlobalization,YaleUniversity

FormerPresidentofMexico

ViceChairman,BankofAmerica/

MerrillLynch

FormerChairman,PublicCompany

AccountingOversightBoard

FormerPresident,FederalReserveBank

ofNewYork

SeniorViceChairman,CitigroupandCitibank

PartnerandSeniorAdvisor,TheRohatyn

Group

FormerManagingDirector,JPMorganChase

FormerManagingDirector,WorldBank

ProfessorofBusinessAdministration

&PublicPolicy,UniversityofMichigan

FormerMember,CouncilofEconomic

Advisors

emerItus members

HonoraryChairman,GroupofThirty

FormerGovernor,BankofEngland

AdvisoryDirector,MorganStanley

FormerPresident,MorganStanley

International

FormerCOO,FederalReserveBank

ofNewYork

FormerDirector,Institutderdeutschen

Wirtschaft

President,InstituteforInternational

MonetaryAffairs

FormerChairman,BankofTokyo

SeniorAdvisor,FinancialStabilityInstitute

FormerU.S.ComptrolleroftheCurrency

FormerChairman,DanmarksNationalbank

R e fo Rm o f t h e

WalkerProfessorofEconomics&

InternationalFinanceEmeritus,

PrincetonUniversity

FormerSeniorFellowinInternational

Economics,CouncilonForeignRelations

Conseiller,BNPParibas

FormerPresident,EuropeanBankfor

ReconstructionandDevelopment

FormerGovernor,BanquedeFrance

FormerManagingDirector,International

MonetaryFund

DeputyChairman,PacificAsiaRegion,

theTrilateralCommission

FormerDeputyGovernor,BankofJapan

FormerDeputyGovernor,JapanDevelopment

Bank

DistinguishedResearchFellowMunkCentre

forInternationalStudies,Toronto

FormerAmbassadorforTradeNegotiations,

Canada

FormerHead,OECDEconomicsandStatistics

Department

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InternationalInsolvenciesintheFinancialSector

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GlobalInstitutions,NationalSupervisionandSystemicRisk

Study Group on Supervision and Regulation. 1997

LatinAmericanCapitalFlows:LivingwithVolatility

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DefiningtheRolesofAccountants,BankersandRegulatorsintheUnitedStates

Study Group on Accountants, Bankers and Regulators. 1994

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Peter B. Kenen. 1992

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Pedro Aspe, Andres Bianchi and Domingo Cavallo, with discussion by S.T. Beza and William Rhodes. 1992

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FinancingEasternEurope

Richard A. Debs, Harvey Shapiro and Charles Taylor. 1991

TheRisksFacingtheWorldEconomy

The Risks Facing the World Economy Study Group. 1991

TheCreditCrisis:TheQuestforStabilityandReform

E. Gerald Corrigan. 2008

LessonsLearnedfromthe2008FinancialCrisis

Eugene A. Ludwig. 2008

TwoCheersforFinancialStability

Howard Davies. 2006

ImplicationsofBaselIIforEmergingMarketCountries

Stanley Fischer. 2003

IssuesinCorporateGovernance

William J. McDonough. 2003

PostCrisisAsia:TheWayForward

Lee Hsien Loong. 2001

LicensingBanks:StillNecessary?

Tommaso Padoa-Schioppa. 2000

BankingSupervisionandFinancialStability

Andrew Crockett. 1998

GlobalRiskManagement

Ulrich Cartellieri and Alan Greenspan. 1996

TheFinancialDisruptionsofthe1980s:ACentralBankerLooksBack

E. Gerald Corrigan. 1993

79.LessonsLearnedfromPreviousBankingCrises:Sweden,Japan,Spain,andMexico

Stefan Ingves, Goran Lind, Masaaki Shirakawa, Jaime Caruana, Guillermo Ortiz. 2009

78.TheG30atThirty

Peter B. Kenen. 2008

77.DistortingtheMicrotoEmbellishtheMacro:TheCaseofArgentina

Domingo Cavallo, Joaquín Cottani. 2008

76.CreditCrunch:WhereDoWeStand?

Thomas A. Russo. 2008

75.Banking,Financial,andRegulatoryReform

Liu Mingkang, Roger Ferguson, Guillermo Ortiz. 2007

74.TheAchievementsandChallengesofEuropeanUnionFinancialIntegrationandItsImplicationsfortheUnitedStates

Jacques de Larosière. 2007

73.NineCommonMisconceptionsAboutCompetitivenessandGlobalization

Guillermo de la Dehesa. 2007

72.InternationalCurrenciesandNationalMonetaryPolicies

Barry Eichengreen. 2006

71.TheInternationalRoleoftheDollarandTradeBalanceAdjustment

Linda Goldberg and Cédric Tille. 2006

70.TheCriticalMissionoftheEuropeanStabilityandGrowthPact

Jacques de Larosière. 2004

69.IsItPossibletoPreservetheEuropeanSocialModel?

Guillermo de la Dehesa. 2004

R e fo Rm o f t h e

68.ExternalTransparencyinTradePolicy

Sylvia Ostry. 2004

67.AmericanCapitalismandGlobalConvergence

Marina v. N. Whitman. 2003

66.Enronetal.:MarketForcesinDisarray

Jaime Caruana, Andrew Crockett, Douglas Flint, Trevor Harris, Tom Jones. 2002

65.VentureCapitalintheUnitedStatesandEurope

Guillermo de la Dehesa. 2002

64.ExplainingtheEurotoaWashingtonAudience

Tommaso Padoa-Schioppa. 2001

63.ExchangeRateRegimes:SomeLessonsfromPostwarEurope

Charles Wyplosz. 2000

62.DecisionMakingforEuropeanEconomicandMonetaryUnion

Erik Hoffmeyer. 2000

61.ChartingaCoursefortheMultilateralTradingSystem:TheSeattleMinisterialMeetingandBeyond

Ernest Preeg. 1999

60.ExchangeRateArrangementsfortheEmergingMarketEconomies

Felipe Larraín and Andrés Velasco. 1999

59.G3ExchangeRateRelationships:ARecapoftheRecordandaReviewofProposalsforChange

Richard Clarida. 1999

58.RealEstateBoomsandBankingBusts:AnInternationalPerspective

Richard Herring and Susan Wachter. 1999

57.TheFutureofGlobalFinancialRegulation

Sir Andrew Large. 1998

56.ReinforcingtheWTO

Sylvia Ostry. 1998

55.Japan:TheRoadtoRecovery

Akio Mikuni. 1998

54.FinancialServicesintheUruguayRoundandtheWTO

Sydney J. Key. 1997

53.ANewRegimeforForeignDirectInvestment

Sylvia Ostry. 1997

52.DerivativesandMonetaryPolicy

Gerd Hausler. 1996

51.TheReformofWholesalePaymentSystemsandImpactonFinancialMarkets

David Folkerts-Landau, Peter Garber, and Dirk Schoenmaker. 1996

50.EMUProspects

Guillermo de la Dehesa and Peter B. Kenen. 1995

49.NewDimensionsofMarketAccess

Sylvia Ostry. 1995

48.ThirtyYearsinCentralBanking

Erik Hoffmeyer. 1994

47.Capital,AssetRiskandBankFailure

Linda M. Hooks. 1994

46.InSearchofaLevelPlayingField:TheImplementationoftheBasleCapitalAccordinJapanandtheUnitedStates

Hal S. Scott and Shinsaku Iwahara. 1994

45.TheImpactofTradeonOECDLaborMarkets

Robert Z. Lawrence. 1994

44.GlobalDerivatives:PublicSectorResponses

James A. Leach, William J. McDonough, David W. Mullins, Brian Quinn. 1993

43.TheTenCommandmentsofSystemicReform

Vaclav Klaus. 1993

42.Tripolarism:RegionalandGlobalEconomicCooperation

Tommaso Padoa-Schioppa. 1993

41.TheThreatofManagedTradetoTransformingEconomies

Sylvia Ostry. 1993

40.TheNewTradeAgenda

Geza Feketekuty. 1992

39.EMUandtheRegions

Guillermo de la Dehesa and Paul Krugman. 1992

38.WhyNow?ChangeandTurmoilinU.S.Banking

Lawrence J. White. 1992

37.AreForeign-ownedSubsidiariesGoodfortheUnitedStates?

Raymond Vernon. 1992

36.TheEconomicTransformationofEastGermany:SomePreliminaryLessons

Gerhard Fels and Claus Schnabel. 1991

35.InternationalTradeinBankingServices:AConceptualFramework

Sydney J. Key and Hal S. Scott. 1991

34.PrivatizationinEasternandCentralEurope

Guillermo de la Dehesa. 1991

33.ForeignDirectInvestment:TheNeglectedTwinofTrade

DeAnne Julius. 1991

32.InterdependenceofCapitalMarketsandPolicyImplications

Stephen H. Axilrod. 1990

31.TwoViewsofGermanReunification

Hans Tietmeyer and Wilfried Guth. 1990

R e fo Rm o f t h e

30.EuropeintheNineties:ProblemsandAspirations

Wilfried Guth. 1990

29.ImplicationsofIncreasingCorporateIndebtednessforMonetaryPolicy

Benjamin M. Friedman. 1990

28.FinancialandMonetaryIntegrationinEurope:1990,1992andBeyond

Tommaso Padoa-Schioppa. 1990

30Group of Thirty1726 M Street, N.W., Suite 200Washington, DC 20036ISBN: I-56708-148-7