The upcoming IMF-World Bank Annual Meetings in Singapore will take place against a backdrop in which Asia is playing an increasingly dynamic role in the world economy and the IMF is reforming its governance, policy advice, and operations to meet globalization’s challenges and its members’ evolving needs. David Burton—Director of the IMF’s Asia and Pacific Department and head of the Fund working group on quota and voice reform—speaks with the IMF Survey about the significance of progress on voice and quotas in the IMF and about the opportunities and challenges that the future has in store for the Asian region.
Burton: On August 31, the IMF’s Executive Board agreed on an important package of quota and voice reforms, which it has proposed to the Board of Governors for approval (with the vote to be completed by September 18). The broad goals are twofold: to make progress in realigning members’ quotas with their weight in the global economy—this should benefit a number of emerging market economies, including some in Asia—and, equally important, to enhance the voice and participation of low-income countries.
We’ve been able to move ahead on this issue because the membership sees these reforms as vital for the future effectiveness and credibility of the IMF. Countries also recognize that this is not a zero-sum game. The reforms will strengthen the Fund; and all countries, not least those in Asia, will gain. China and Korea, as well as Mexico and Turkey, will receive initial ad hoc quota increases. But other dynamic emerging market countries will benefit from the further reforms that are part of the package.
What would I say to critics? The proposed reforms will bring about significant progress in realigning members’ quota shares over the next two years, and they will allow for more flexibility of quota shares in the future. The reforms call for the first increase in basic votes since the Fund was established and create a mechanism to preserve the share of basic votes in total voting power. While the proposed reforms are far reaching, the structure of voting power will not change dramatically overnight: the IMF is a cooperative institution, and change has to be measured and respectful of the interests of all members.
Burton: The Fund welcomes Asia’s strong recovery from the 1997–98 crisis and impressive economic growth record, which stands out as the best among emerging markets in recent years. The IMF’s role has now returned to a more normal and desirable position, where it focuses on its traditional role of conducting surveillance.
We believe Asia, like other regions, benefits from effective IMF surveillance, including through the new multilateral consultation instrument. As an economic region that is very open to both capital flows and trade, Asia has much to gain from global financial stability and healthy global economic growth—two goals that a strong Fund can promote.
As part of the IMF’s medium-term strategy and in response to calls from Asian policymakers, the Fund is focusing its advice on crisis prevention, improved financial sector surveillance, and strengthened regional and global surveillance. Also, many countries in the region still face challenges related to large fiscal deficits and high public debt, and in many cases more progress needs to be made on structural reforms, strengthening financial systems, and improving the investment climate. These are areas where the Fund’s knowledge and crosscountry experience can be helpful.
Asia’s emerging market economies would also benefit from having access to IMF financial resources in times of need. While some countries have amassed ample reserves and strengthened regional economic ties, holding large reserves is costly, and regional financing arrangements, although complementary to Fund financing, have limits. The IMF is considering a new liquidity instrument that would allow emerging market members with strong policies to benefit from added protection while reducing the need for large precautionary reserve holdings. We clearly see some interest in such an instrument in Asia.
Burton: Asia’s economies are, by most metrics, well connected with global financial markets. But regional financial integration—as measured, for instance, by cross-border banking or portfolio flows—is much less advanced. Strengthened intraregional financial linkages are a high priority for Asian governments that want to better use the region’s record-high savings, and they can serve as an added catalyst for intraregional trade.
The IMF strongly supports initiatives under way to deepen local bond markets, further develop market infrastructure, harmonize financial regulations with international best practice, and provide financing through the Chiang Mai Initiative. Cross-country financial ties are also being established largely in a bottom-up, market-driven process: regional banks, firms, and investors increasingly favor a pan-Asian focus in their expansion, financing, and portfolio decisions. But regional policy initiatives are playing an important enabling role.
I have little doubt that market-driven integration, bolstered by appropriate institutions, will gather steam in the foreseeable future. In fact, deeper domestic and regional markets will stimulate greater intraregional capital flows and lead to greater market depth and breadth. These stronger financial linkages may eventually lead to monetary cooperation, but a single currency is a distant goal, at best. Convergence of the region’s economic and legal structures is far from complete, and it will take considerable time before the requirements for monetary unification are met.
The immediate challenge for Asian governments is to adopt policy frameworks that balance the need for stable exchange rates—to promote intraregional trade of goods and capital—with the need to cope with international capital mobility that arises from financial integration, including the risk of sudden changes in investor sentiment. In my view, this balance is best achieved through flexibly managed exchange rate systems.
Burton: The suspension is disappointing, because the world is missing an important opportunity to boost the global economy and raise growth prospects in poorer countries. And, yes, it is likely to galvanize efforts to forge and deepen regional or bilateral trade agreements.
Such trade agreements may have benefits, of course, to the extent that they promote customs cooperation, spur the harmonization of standards, and further the integration of the economies concerned. But they may also distort trade. To mitigate these risks, the agreements should have broad-based product coverage; emphasize complementary liberalization based on most-favored-nation status; and implement transparent, consistent, and liberal rules of origin. Even at their best, though, regional trade deals are no substitute for successful multilateral reform. Getting the Doha Round moving forward again is therefore of great importance.
Burton: Our goal remains to work closely with Asia’s 17 low-income countries, which are a diverse group with diverse problems. Don’t forget that China and India, despite significant progress in poverty reduction, are still home to millions of poor people. The IMF is helping in various ways. In some countries, Fund financing is supporting adjustment and reform programs. In others, we work closely through surveillance, extensive technical assistance, and collaboration with donors and other agencies. The IMF recently provided debt relief to Cambodia.
An important aspect of the IMF’s medium-term strategy is to ensure that our engagement in low-income countries is more effective. Our work must support market-oriented policies and economic institutions conducive to sustained growth, trade, and poverty reduction. We’re working with countries to ensure that macroeconomic policies are geared toward debt sustainability, durable economic growth, and maximizing the ability of these economies to absorb aid and benefit from debt relief. The aim is to achieve higher growth and attain the MDGs [Millennium Development Goals]. All of Asia’s low-income countries have made some strides toward poverty reduction, but much more remains to be done.
Burton: Absolutely. It’s incontestable that sustained reforms and openness to trade are worth the effort and that regulatory reform and the reduction of red tape pay off. Look at the very different performances of India’s manufacturing sector, which has languished under the burden of government regulations and licensing requirements, and its services sector, which has flourished under a much freer regulatory regime.
Infrastructure is essential, too, and governments need the fiscal space to develop adequate infrastructure. This is still very much an issue for India. Also, you see how crucial human capital can be. India’s investment in higher education has paved the way for its success in information technology and other high-skill businesses.
Finally, to cope with a globalized world in which production is constantly shifting and technology is constantly changing, economies have to become increasingly flexible. Businesses must be able to adapt quickly, and that’s why it is critical to minimize the burdens of regulation and red tape.