Perspectives on better global economic governance (2)
by
KEMAL DERVİŞ*

A renewed and reformed IMF should and could be the key international institution in providing the critical "global public good" of financial and macroeconomic stability. National policies will always be central, and other international and regional organizations also matter a great deal, but the current crisis has shown how desirable international macroeconomic policy coordination is in today's world economy. The need to manage a worldwide recovery provides a unique opportunity to reform the IMF and make it into an effective and legitimate world economic organization that facilitates macroeconomic policy coordination and that has sufficient resources to play a lead role in cooperation with national treasuries and central banks in the provision of cross-border precautionary and emergency finance.

Part of the reform has to do with substantive policy issues, in which the role and the nature of the IMF's policy advice needs to be strengthened and improved to ensure that it is effective. This includes a stronger role in macroeconomic policy reviews and policy coordination with an enhanced commitment by all member states, including rich countries, to this process. The times when the IMF's role was to advise and exercise surveillance with respect to developing countries only should be gone. The current crisis has demonstrated that all countries need advice and formal policy reviews by a body that is at arm's length from immediate domestic political interests and pressures. The reform should also include a more rapid and less constraining process for providing liquidity to countries facing balance-of-payments problems due to external shocks. This will involve both a review of existing lending facilities and a very substantial expansion of resources available. An expansion in the allocation of Special Drawing Rights (SDRs) and an enhanced role for the SDRs or, better, for a new SDR in the global reserve system, should be part of this reform. A detailed discussion of these matters is beyond the scope of this note focusing on governance issues only.

Reforming the governance of and decision-making at the IMF, to enhance both legitimacy and effectiveness, is critical to making the IMF into a 21st century world economic organization. The key to such governance reform could be the transformation of the International Monetary and Financial Committee (IMFC) into a governing council of ministers that would act as a real new governance mechanism. This proposal is currently debated actively and reflects the need for stronger multilateralism, which is in the interests of all, but particularly also in the interests of the developing countries, provided of course the new stronger governance arrangements take into account the role and weight the developing countries have gained in the world economy. The seats on the council and the weighting should be adjusted -- not once and for all, but in a continuous and dynamic way -- to reflect new economic realities. This world economic council would have universal representation through the system of constituencies -- with some 20+ constituencies each electing a governing council member.

It would be natural to continue with the step-by-step reweighing of the existing constituencies, a process started in a very modest way on the occasion of the Singapore annual meetings in 2006. The next steps should be bolder, however, and include both quota increases, changes in country weights and a major reorganization of the existing constituencies. A major step should be taken at the İstanbul annual meetings in the fall of 2009. Other steps should follow, perhaps every three years. The key advantage of a constituency-based system is that it can be both universal (every country can participate) and have at the top a reasonably small and compact group of 20+ actual decision makers, with weighted voting reflecting objective criteria rather than historical accident or the "de facto" persistence of the past.