Photo: Bloomberg
Photo: Bloomberg

International policy cooperation: No ‘effective’ advocate

Emerging economies have long pressed for reform of the international monetary system, or non-system, as it is commonly described

Global policy cooperation, which was at the forefront of the G-20’s agenda in 2009, has far receded into the background since. In fact, it is going wayward as the US Federal Reserve reverses its monetary policy and fundamental fissures resurface. Emerging economies have long pressed for reform of the international monetary system, or non-system, as it is commonly described.

Frustrated by the US failure to ratify the 2010 reform proposals—doubling of the International Monetary Fund (IMF) quota (to $720 billion), total quota redistribution in favour of emerging markets (a six percentage point increase) with two directorships out of a total of 24—the finance ministers’ communiqué at the spring IMF-World Bank meetings asked the US to ratify these by the year-end, failing which the IMF would be asked to develop options for the next steps.

There is little guidance as to what these could be, but other steps are one pointer as to where international policy cooperation might be headed: The BRICS (Brazil, Russia, India, China and South Africa) group last year moved to form a forex reserves pool ($100 billion) to cope with capital flows that swing around with US monetary policy, making their lives miserable.

This is perhaps the only way to go, given the reality. After all, it is hard to reconcile common policy objectives in large country groups like the G-20 especially when the IMF also lacks representative governance structures.

Indeed, the fact there wasn’t effective advocacy of global interests was identified as a key lacuna in the existing international financial architecture by the Palais Royal Initiative—a group of ministers, central bank governors and officials of relevant national or international institutions convened by Michel Camdessus, Alexandre Lamfalussy and the late Tommaso Padoa-Schioppa (former Reserve Bank of India governor Y.V. Reddy was one of its members).

In their 2011 discussion paper on various aspects of international monetary reform, this group considered the need for a legitimate and effective decision-making structure, or a mechanism to break the de facto “pact of non-aggression" between the US and European countries that exists in the current IMF governance.

In this context, the group suggested formalizing the idea of the G-20 with a three-tier structure embodying universal representation: Heads of government or state, who meet sparingly (e.g., once a year) except in times of crisis, at the top; finance ministers and central bank governors, to take strategic decisions related to functioning of the global monetary system at the next level (in the framework of a council as envisaged in the IMF’s Articles of Agreement); and executive directors overseeing the work of the IMF, and its managing director.

This structure, they suggested, could be combined with a global advisory committee of eminent personalities to provide independent advice to the IMF in the fields of surveillance, management of international liquidity and reserves, whether at its own initiative or at their request. The advice wouldn’t be binding but would be made public.

Of course, the cooperative approach suggested remained a proposal only while the IMF’s governance remained unreformed. But the festering problems and discontent led smaller groups to guard their own interests, as the BRICS evolution shows. However, neither serves the larger, global cause.

Renu Kohli is a New Delhi-based macroeconomist.