Agenda analysis 2: IMF reform
Europe’s old powers fighting against Asia’s young rich
This is the second of a four-part series on the G20 Seoul Summit agenda. ― ED.
1. Framework for strong, sustainable, balanced growth (Aug. 13)
2. Reform of the IMF (Aug. 23)
3. Basel III new banking regulations (Sep. 2)
4. Development of poor countries (Sept. 12)
By Cho Jin-seo
Seoul Summit’s hottest topic is going to be the reform of international financial institutions, which is referred to as ‘IFI reform’ by acronym-loving government officials. At the core of the debate lies the International Monetary Fund (IMF).
Debates have been going on via international video-conferences and behind-the-scene negotiations, about how to shift the voting shares in the IMF from over-represented nations to under-represented nations. The former group is mostly economically advanced nations in the West, while the latter is emerging powers in Asia and the rest of the world.
“The IMF works like a farmers’ cooperation. You pay for more shares, and you can claim more benefits when you need them,” a high-level official at Korea’s G20 preparation team says.
The IMF was created in 1944. Its main purpose is to raise a pool of emergency funds from member nations, and lend them when their economy is in trouble. The amount of the loan, as well as its conditions, is decided by the recipient country’s contribution to the pool, as well as by its political influence within the IMF.
Financial Safety Net ― a new IMF loan program
In global economic crises, mid- and small-sized economies such as Korea tend to suffer a liquidity crisis because foreign investors cash out their money in dollars. The IMF has traditionally provided loans to those countries in a liquidity crisis under strict conditions.
The G20 wants to change the rule. Under a new program called Flexible Credit Line (FCL), the IMF began to provide credit guarantees to countries with good track records, before a crisis actually hits.
At the Seoul Summit, the IMF is going to announce plans to expand this FCL program by loosening application conditions and securing more funds. “It will be a gradual shift of focus from post-crisis bailout to pre-crisis prevention,” a Seoul G20 official said.
Further discussions on currency swaps _ a country promises to provide its currency to another in case of emergency, at a pre-arranged rate ― have been dropped because of objections from central banks, who worry that such arrangement may hamper domestic monetary policies.
Vote war
The reform of the IMF loan program is going to take place at the same time as a reform in its governance ― a two-track approach.
The IMF has been blamed for not being able to stop financial crises spreading from one nation to other countries. Many believe there is a more fundamental problem regarding its governance and decision-making process. The IMF agrees that a restructuring is needed in its governance.
The reforms are focused on two issues. First, the voting quota. The United States and Japan have the largest voting powers in the organization, followed by Germany, France and the United Kingdom. China, which is now officially the world’s second largest economy, comes in sixth. Korea is underrepresented as well. It has only 1.41 percent of the voting share, while its economic size is relevant to over a 2 percent share.
The IMF and the G20 have already agreed to shift at least 5 percent of shares from over-represented countries to under-represented countries. Still, problems remain on how much goes to whom.
Emerging nations say that the shift should be as much as 10 percent, while advanced nations want it be less. Also, there are Western countries whose share is also under-represented at the IMF. Whether or not to include those nations in the reform plan is a controversial matter, because previous G20 and IMF statements did not clarify this.
“We like to say that the (IMF reform) statement is written in creative ambiguity,” the official said. “You can imagine how the nations will fight against each other over this ambiguity when they meet before the Seoul Summit.”
The whole IMF pool is worth about $350 billion. To change the quota without refunding, it needs to raise more money from countries who want to increase their shares. As for Korea, the country may need to double its $4.5 billion membership fee to raise its voting shares to around 1.8 percent.
Sakong Il a candidate for IMF head
The second reform area is about people. “Most IMF analysts are macro-economists with degrees from Ivy League schools. The organization needs more diverse academic backgrounds,” the Korean official said.
The boardroom is also a subject of demographic reform. But the most crucial is the position of the managing director. Dominique Strauss-Kahn, the incumbent head, is believed to soon be leaving the IMF to serve in the French political circle. The post has been rationally taken by Europeans in a tacit agreement with the United States, in return to give the Americans the head seat of the World Bank.
Strauss-Kahn himself said at a conference in Korea last month that he would like to see a non-European successor. But he then added that that will happen after he serves 20 more years.
Some believe that this was not entirely a joke.
“The discussion of a non-European IMF chief has been around here for about two decades. Strauss-Kahn knows that well. So he might have mentioned 20 years with purpose, to let people know the IMF reform is going to be very hard,” an official at Korea’s finance ministry said.
Some think that it is not impossible for an Asian to take the job once Strauss-Kahn leaves. The IMF has the worst image in Asia among all places, because many countries here have bad memories of it during the Asian financial crisis. In Korea, the period is even called “the IMF crisis.” Choosing an Asian, preferably a Korean, candidate will do more good than harm for the publicity of the IMF in the region.
Sakong Il, the president of Korea’s G20 preparation committee, is believed to have that dream, though he has never said so in public.
Sakong has supporters overseas, too. Fred Bergsten, an assistant secretary for international affairs at the U.S. Treasury Department and director of the Peterson Institute for International Economics, is one of them.
In a conference in Seoul last year, Bergsten showed his support for Sakong. He said it is needed to appoint “the next managing director from an emerging country such as Governor Zhou Xiaochuan of the People’s Bank of China, Dr. Montek Ahluwalia of India or Dr. Sakong Il from Korea.”
cjs@koreatimes.co.kr
http://www.koreatimes.co.kr/www/news...123_71829.html
Europe’s old powers fighting against Asia’s young rich
This is the second of a four-part series on the G20 Seoul Summit agenda. ― ED.
1. Framework for strong, sustainable, balanced growth (Aug. 13)
2. Reform of the IMF (Aug. 23)
3. Basel III new banking regulations (Sep. 2)
4. Development of poor countries (Sept. 12)
By Cho Jin-seo
Seoul Summit’s hottest topic is going to be the reform of international financial institutions, which is referred to as ‘IFI reform’ by acronym-loving government officials. At the core of the debate lies the International Monetary Fund (IMF).
Debates have been going on via international video-conferences and behind-the-scene negotiations, about how to shift the voting shares in the IMF from over-represented nations to under-represented nations. The former group is mostly economically advanced nations in the West, while the latter is emerging powers in Asia and the rest of the world.
“The IMF works like a farmers’ cooperation. You pay for more shares, and you can claim more benefits when you need them,” a high-level official at Korea’s G20 preparation team says.
The IMF was created in 1944. Its main purpose is to raise a pool of emergency funds from member nations, and lend them when their economy is in trouble. The amount of the loan, as well as its conditions, is decided by the recipient country’s contribution to the pool, as well as by its political influence within the IMF.
Financial Safety Net ― a new IMF loan program
In global economic crises, mid- and small-sized economies such as Korea tend to suffer a liquidity crisis because foreign investors cash out their money in dollars. The IMF has traditionally provided loans to those countries in a liquidity crisis under strict conditions.
The G20 wants to change the rule. Under a new program called Flexible Credit Line (FCL), the IMF began to provide credit guarantees to countries with good track records, before a crisis actually hits.
At the Seoul Summit, the IMF is going to announce plans to expand this FCL program by loosening application conditions and securing more funds. “It will be a gradual shift of focus from post-crisis bailout to pre-crisis prevention,” a Seoul G20 official said.
Further discussions on currency swaps _ a country promises to provide its currency to another in case of emergency, at a pre-arranged rate ― have been dropped because of objections from central banks, who worry that such arrangement may hamper domestic monetary policies.
Vote war
The reform of the IMF loan program is going to take place at the same time as a reform in its governance ― a two-track approach.
The IMF has been blamed for not being able to stop financial crises spreading from one nation to other countries. Many believe there is a more fundamental problem regarding its governance and decision-making process. The IMF agrees that a restructuring is needed in its governance.
The reforms are focused on two issues. First, the voting quota. The United States and Japan have the largest voting powers in the organization, followed by Germany, France and the United Kingdom. China, which is now officially the world’s second largest economy, comes in sixth. Korea is underrepresented as well. It has only 1.41 percent of the voting share, while its economic size is relevant to over a 2 percent share.
The IMF and the G20 have already agreed to shift at least 5 percent of shares from over-represented countries to under-represented countries. Still, problems remain on how much goes to whom.
Emerging nations say that the shift should be as much as 10 percent, while advanced nations want it be less. Also, there are Western countries whose share is also under-represented at the IMF. Whether or not to include those nations in the reform plan is a controversial matter, because previous G20 and IMF statements did not clarify this.
“We like to say that the (IMF reform) statement is written in creative ambiguity,” the official said. “You can imagine how the nations will fight against each other over this ambiguity when they meet before the Seoul Summit.”
The whole IMF pool is worth about $350 billion. To change the quota without refunding, it needs to raise more money from countries who want to increase their shares. As for Korea, the country may need to double its $4.5 billion membership fee to raise its voting shares to around 1.8 percent.
Sakong Il a candidate for IMF head
The second reform area is about people. “Most IMF analysts are macro-economists with degrees from Ivy League schools. The organization needs more diverse academic backgrounds,” the Korean official said.
The boardroom is also a subject of demographic reform. But the most crucial is the position of the managing director. Dominique Strauss-Kahn, the incumbent head, is believed to soon be leaving the IMF to serve in the French political circle. The post has been rationally taken by Europeans in a tacit agreement with the United States, in return to give the Americans the head seat of the World Bank.
Strauss-Kahn himself said at a conference in Korea last month that he would like to see a non-European successor. But he then added that that will happen after he serves 20 more years.
Some believe that this was not entirely a joke.
“The discussion of a non-European IMF chief has been around here for about two decades. Strauss-Kahn knows that well. So he might have mentioned 20 years with purpose, to let people know the IMF reform is going to be very hard,” an official at Korea’s finance ministry said.
Some think that it is not impossible for an Asian to take the job once Strauss-Kahn leaves. The IMF has the worst image in Asia among all places, because many countries here have bad memories of it during the Asian financial crisis. In Korea, the period is even called “the IMF crisis.” Choosing an Asian, preferably a Korean, candidate will do more good than harm for the publicity of the IMF in the region.
Sakong Il, the president of Korea’s G20 preparation committee, is believed to have that dream, though he has never said so in public.
Sakong has supporters overseas, too. Fred Bergsten, an assistant secretary for international affairs at the U.S. Treasury Department and director of the Peterson Institute for International Economics, is one of them.
In a conference in Seoul last year, Bergsten showed his support for Sakong. He said it is needed to appoint “the next managing director from an emerging country such as Governor Zhou Xiaochuan of the People’s Bank of China, Dr. Montek Ahluwalia of India or Dr. Sakong Il from Korea.”
cjs@koreatimes.co.kr
http://www.koreatimes.co.kr/www/news...123_71829.html