How do you transform the IMF, an institution until recently widely criticized for its lack of legitimacy and representativeness, “on the verge of irrelevance” into the premier tool of the international community to fight the global crisis ? Simply by throwing behind it the full support of the world leaders. How do we ensure that this unprecedented support and coordination at the international level does not evaporate once the crisis is over ? Simply by transforming the various groups such as the G 20 and G 8 into a Global Economic Council-Gleco. This new international body should oversee the proper functioning of the global economy and the stability of the international financial system by providing close political support and strategic guidance to all the IFIs.
The worst economic crisis of the last seventy years has convinced even the most skeptical critics of the wisdom of having at hand an experienced “international fire brigade” such as the IMF with the appropriate tools and expertise to assist countries in financial distress and coordinate global economic policies . However, as the recent experience has demonstrated, the effective policy coordination at the international level is possible only with the direct and systematic involvement of the worlds leaders. This has been one of the main lessons of the crisis, after the near collapse of the financial system. Efforts to address the root causes of the financial turmoil and combat the global recession are much more effective if coordinated across countries. Looking forward, a high degree of international cooperation will be even more crucial for achieving a meaningful reform of the financial markets and for devising effective exit strategies after the crisis. Addressing these issues in a desultory way, with a fragmented arrays of decision-making bodies and overlapping responsibilities is not the best way to proceed.
Most reform proposals have focused on the IMF rather than on the broader issue of the entire Bretton Wood system. This is not surprising, but not satisfactory. Despite all its alleged shortcomings, the IMF has been able to discharge its responsibilities during the crisis quite efficiently even without far reaching reforms. To the extent that some changes are needed urgently, they should ensure that the activities of the Fund are fully backed by the world political leaders; however, this is an issue that concerns the governance of all the IFI and not just the IMF. Indeed, the correct approach to the governance issue should be viewed in the framework of a broader reform of all the IFI institutions. This overreaching objective could be achieved by elevating the concept of an internal ministerial body with decision-making powers to a Council not inside but above the Fund, also responsible for the political supervision of the other IFIs, including the World Bank (WB), the Financial Stability Board (FSB) and the World Trade Organization (WTO).
Briefly stated, the Global Economic Council (GLECO ) would supersede the G 20 and G 8 as the governing body of the global economy. Contrary to the selectivity of those groups, the Gleco will have a universal representations through the system of the country-constituencies as it is now the case with the IMFC, and the IMF/WB Boards. Gleco’s membership should be at the most senior political level , i.e. Finance Ministers ( gathering 2/3 times per year) and the Heads of Government/State, meeting once a year. Since the GLECO will be an organ above the IFIs, there is no need to alter the internal governing structure of these institutions; however the composition of the Global Council should closely mirror the Boards of the IMF and the WB as these bodies should provide the necessary link with the ministers.
The main role of the GLECO will be to provide strategic guidance and high level political support to the activities of the IFIs. This is of particular importance for the Fund. In effect, it is inconceivable that having entrusted the Fund with vastly increased financial resources and new responsibilities, the world leaders would not want to retain a substantial degree of control and supervision. Even more fundamentally, the Fund will not be in a position to discharged effectively the new task bestowed upon itself without the close support of the political authorities; this is certainly so for the development of the Early Warning Exercise and the exit strategies, not to mention the enhanced surveillance on domestic policies for maintaining global stability and sustainable growth.
The establishment of the GLECO will also address another key issue of the global governance which is the need to update the rules and institutions of Bretton Wood. Instead of continuing with the current approach of providing ad-hoc solutions to specific problems, the GLECO could launch an international conference to tackle in a systematic way all these issues.. Fifty years after the establishment of the Bretton Wood system it is about time to devise a new architecture of the global economic order geared to the challenges of the XXI century.
Published in the Financial Times, 16TH of August 2009