The call to action by the IMF to examine the future of the institution is timely. On the back of the 80-year anniversary of the Bretton Woods Conference, it is also a good moment to reflect on the objectives at the time and to what extent those had been met. The initiative will presumably review the governance of the institution and consider new tasks against the contemporary challenges of the international economy. This, however, would be a mistake. The IMF has critical unfinished business. Looking forward, the IMF does not need to do new things but become much better at what it was meant to do.
The IMF is arguably the most important and successful international financial institution. It projects unparallel competence and has played a critical role in addressing global economic challenges. Preserving it is undoubtedly worthwhile. But how?
The governance of the IMF is in peril. The lack of quota adjustments to reflect the weight of China and other emerging markets has been a major problem and undermines the stated multilateral character of the institution. Quota reform is the sine qua non of multilateralism. But to attempt a more ambitious governance reform will likely struggle to get the needed majorities. The quota reforms were initiated at least in 2000 and to date have not achieved meaningful change. Even more ambitious reforms risk consuming the institution over a long period without producing substantial improvements.
During the 2024 IMF Spring Meetings, repeated hints were made that the IMF could assume an important role in relation to climate change. Some also want the IMF’s role enhanced in sovereign debt restructuring. Others want the IMF to address all “public commons.” These are woeful distractions. Climate change is too important to be a mere add-on for the IMF. Sovereign debt restructuring had failed in the past as the IMF may be perceived as too conflicted a party. Public commons are a woolly concept and risk involvements on too many fronts.
The main purposes of the IMF are narrow. They are principally to eliminate exchange restrictions on current transactions and the establishment of a multilateral system of payments (IMF Articles of Agreement, Article I). Exchange restrictions remain but may no longer represent material limitations in most instances. A multilateral payment system, naturally also dependent on exchange restrictions, has not been achieved.
The Bretton Woods Conference contemplated that a multilateral payment system is one where each country can use its currency to conduct international payments. This has at least two implications. First, that countries would be able to conduct cross-border payments in local currency and not have to rely on currencies of other countries. Second, that countries would find it easier to raise funding abroad in local currency. Both are at the heart of persistent vulnerabilities, particularly for emerging and developing countries. They may be in large part the origin of the financial difficulties that required repeated IMF assistance in the first place.
The establishment of a multilateral payment system should be the utmost priority of the IMF. It has not only a legal mandate, but also the experience and resources to pursue it. The orderly integration of China’s and other emerging markets’ currencies into the international monetary system would establish a more level playing field in international economic and financial relations. Since 2000, the G7 as proxy for the currencies that dominate the international economy saw its share in world GDP decline from 65 percent to 44 percent today.* This shift needs to be reflected in a more inclusive international monetary system.
The IMF would need to convince its members that it is their interest to attain greater diversification in the international use of currencies. More diversity reduces systematic vulnerability to the policy preferences of individual countries and reduces the potential for volatility in exchange market conditions.
The IMF needs to assess what it would take for the international monetary system to change. It could consider mobilizing its resources to providing a new facility to facilitate the transition to a more multilateral system. The redistribution of exchange rate risk could be shared among participants or partially absorbed by the IMF. Old ideas like a substitution account could be revisited to assess whether such approach could be workable today. New ideas like central bank digital currencies (CBDC) where the IMF has been a laggard could also play a critical part.
The temptation to look for an emboldened mandate is clear. While better governance will remain critical to buttress the legitimacy of the IMF, it should not become an objective in itself. The purposes of the IMF must remain at the center of its remit. Few areas will have a more far-reaching positive impact on the international economy than establishing a multilateral payment system. This was true 80 years ago at the Bretton Woods Conference and should still be the benchmark for the future role of the IMF. The way forward for the IMF should be the past.
*IMF WEO April 2024. At current U.S. dollars. G7: Canada, France, Germany, Italy, Japan, United Kingdom, United States.
Ousmène Jacques Mandeng, CEO Wire Coin, Visiting Fellow, London School of Economics and Political Science
All views expressed by members are their own and not reflective of the views of the Bretton Woods Committee.