THE CHALLENGES TO THE IMF
The IMF has a crucial role to play in ensuring our global financial system works properly. Whoever becomes its new Managing Director must be able to tackle the challenges and changing nature of the job.
The search is now on for a replacement for Michel Camdessus as Managing Director of the International Monetary Fund (IMF) on his retirement early next year. Almost immediately after the announcement of his intention to retire from this important job, everyone has been reminded that the appointment of a replacement is very much a political process. By contrast, very little is said about seeking the right person for the right job, or about the changing nature of the job itself.
At a time when international finance is posing so many new and difficult challenges, particularly to the emerging markets, a person capable of appreciating and tackling these challenges from different perspectives is needed. The IMF has a key role to play in international finance, in ensuring that it works in the best interests of the global economy. There are currently wide differences of opinion about how the international financial architecture should be reformed to maximize the benefits and limit the damage that can result from the explosion of international finance. International discussions on this subject have involved extensive participation from the developed markets but have so far seen an under-representation from the small open economies, whose predicament has to be adequately taken into account. We need to strike a better balance here, and the IMF is one important forum in which to achieve this.
International finance is all about facilitating the channeling of savings into productive investments on an international scale so as to promote global economic growth. Innovative products and services help advance this process and contribute to productivity, convenience and the general social good: credit cards, for example - a daily necessity for many of us - were once as novel and unfamiliar as e-banking is today. But financial innovations can also be driven merely by the goal of creating short-term speculative profits, tax avoidance, or the desire to alter the appearance of balance sheets or avoid regulatory controls (the first swaps were, after all, created to avoid UK exchange controls). Very often the important primary objective is overlooked in efforts to develop financial markets as if development is an end in itself. Before the basic financial infrastructure necessary to harness international finance and manage its associated risks to financial stability has been established, fancy financial instruments and derivatives have proliferated. These are the products of sophisticated financial engineering that, when applied to emerging markets, may simply overwhelm the risk management mechanisms which have yet to catch up with such developments and pose potential systemic problems. But if one examines some of these products critically against the basic objective of promoting safe and efficient international financial intermediation, one often finds it difficult to see much meaningful connection – or at least no connection that the average regulator or market participant can readily appreciate.
I know that this comment will sound almost sacrilegious to those who dislike anything negative being said about financial markets. But I would still urge all concerned every now and then to go back to basics and not always take things for granted. Perhaps then we would all not be so carried away by the explosion of international finance that we overlook the kind of dangers that have been haunting us in the past two years.
The reform of the international financial architecture should not be dictated by the priorities of the financial market lobbies. There is a much more important basic purpose that all, including whoever will be heading the IMF, should not overlook.
Joseph Yam
25 November 1999
More information on the IMF can be found here.
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