Editor’s Note: Strong multilateral financial institutions are key in responding to an increasingly globalized financial system. In an interivew by the Council on Foreign Relations, Domenico Lombardi discusses the need for Western countries to support a strengthened International Monetary Fund, while also demanding reform of the institution.
Roya Wolverson: A recent report (PDF) by Senator Richard Luger questioned whether the world really needs the World Bank, the IMF, and the international development banks anymore. What is their relevance today and how has it changed post-financial crisis?
Domenico Lombardi: This recent financial crisis has proven the importance of improving international coordination, improving international response to the escalation of a financial crisis. It would be unwise to withdraw support from the IMF and from the other multilateral institutions so soon after we have seen how important international cooperation can be.
Let’s just revisit what the IMF did in the context of the crisis: The U.S. approach was to immediately leverage on international cooperation to avoid spillovers from the U.S. financial sectors and European countries to the rest of the world. And overall, that strategy has been very effective. The key pillar in that strategy was the International Monetary Fund. Reconfiguring the role the IMF can play in a financial crisis might be unwise, because we have seen what a strong multilateral institution can do. Support to the IMF should be conditioned to stronger reforms. And there are a number of reports that have been drafted on the topic of IMF reform. The IMF has come up with an agenda, and member countries–especially key member countries like the United States–should really put their weight behind the current IMF reform efforts and demand for more reforms rather than less.
Wolverson: Which reforms will be most important in boosting the IMF’s legitimacy internationally?
Lombardi: Reforms are currently focused on increasing the voting power of emerging-market countries and developing countries. However, we should also go beyond quota reform and address what member counties want from the IMF compared to what the Bretton Woods founding fathers wanted in 1944. This question has not been answered and cannot be answered by the IMF itself. It should be tackled by IMF member countries. Against the backdrop of globalizing financial activity, there is a central institution with an oversight role, a strong surveillance role, capable of developing an early assessment whenever countries are turning into a crisis. It needs to have the financial capability to be able to address serious financial shortfalls that any country can have during a crisis. It was established sixty years ago as essentially an institution to support current account crises. We now live in a world dominated by private international capital movement. The scale of those capital flows is massive compared to the current account transactions we had sixty years ago, and therefore the IMF needs to adapt.