Alex Brummer in Washington
WHOLESALE reform of the International Monetary Fund (IMF) moved a step closer this week as plans were unveiled to give the world financial agency more cash and more power. A British initiative to broaden the IMF mandate, allowing it to police capital flows, won support from financial leaders.
Under the new plan proposed by British Chancellor Kenneth Clarke, the IMF would be given authority to encourage the liberalisation and stability of capital markets.
The plan was unveiled by Clarke in his speech to the IMF’s policy-making Interim Committee at which he also endorsed a “modest allocation” of IMF cash to members who have joined since the end of the cold war. This issue caused bitter divisions at the IMF meeting in Madrid two years ago.
The chancellor’s plan for a formal IMF role in capital liberalisation – which won the immediate support of IMF managing director Michel Camdessus – would require a major amendment to the IMF’s articles of association.
The UK believes this could be done in tandem with the capital increase required to improve the IMF’s liquidity. The IMF would like to see its resources doubled to nearly $400-billion, although a somewhat lower figure is likely to be arrived at.
The IMF’s existing articles focus on meeting difficulties arising from the current account of the balance of payments. With the increasing openness of capital markets, Clarke argues that the IMF should be given an explicit mission to encourage further liberalisation. Under the present articles, some nations are positively encouraged to impose capital controls.
But the leading industrial countries believe there is a need to balance new freedoms in the global financial markets with strengthened bank supervision and financial regulation.
United States treasury secretary Robert Rubin argued that “co-operation among financial regulators and supervisors and internal controls and market transparency” were needed – as well as better ways of monitoring the financial systems in emerging markets and electronic money.
In respect of the process of broadening the IMF’s authority over capital markets, Clarke emphasised the need for countries to manage their economies differently. He told the IMF policy-makers that national markets need to be well supervised and regulated so that they can cope with large capital inflows.
Moreover, these inflows should not be allowed to “fuel excessive domestic demand” or be allowed to substitute for domestic savings. The G10 group of industrial countries, with an 11th, Switzerland, as an honorary member – agreed to a doubling of the IMF’s borrowing resources to $50- billion.
This will be done by raising funds for use in emergencies, the New Arrangements to Borrow, from a larger number of countries.
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