Source: The post on the working of the IMF is based on the article “Act with urgency to reform the international monetary system” published in Live mint on 1st November 2023.
UPSC Syllabus Topic: GS Paper 2 International relations – Important International institutions, agencies and fora, their structure, mandate.
News: The global economy faces challenges like climate change, pandemics, and debt. To address this, the article suggests reforming the International Monetary Fund (IMF). The proposed changes focus on making the IMF fairer, updating its responsibilities, and improving its decision-making process. This will help stabilize the global financial system.
Why is there a need to reform the International Monetary Fund (IMF)?
Limited Resources: The global economy’s challenges, from climate change to debt burdens, require more resources than are currently available.
Addressing Inequalities: Current IMF practices risk increasing global inequalities and shortages, necessitating reforms for a fairer system.
Quota Discrepancies: Quotas in the IMF don’t reflect the current economic significance of member countries. For example, China’s quota (6.40 % of total) is disproportionately small compared to its economic stature, while the U.S. (17.43 % of total) enjoys outsized influence. Whereas India’s quota is (2.75 % of total).
Decision-making Power: An 85% majority is needed for crucial IMF decisions, effectively giving the U.S. a veto. This was highlighted as an issue by the Palais Royal Initiative.
Special Drawing Rights (SDR) Allocation: The $650 billion Special Drawing Rights (SDR) allocation in 2021 was distributed based on quotas, benefiting richer countries more than those in need.
Uneven Surveillance: Currently, the IMF’s scrutiny is primarily on countries seeking its funds, leaving influential nations unchecked.
What are the reforms required by the International Monetary Fund (IMF)?
1) Fairness:
Quotas: Adjust to reflect true economic importance. Example: Increase China’s quota for accurate representation.
Composition of Board of Directors: Modify for a balanced representation. Propose reducing the 85% majority, currently granting the U.S. a de facto veto power.
Distribution of Special Drawing Rights (SDR): Change the system for fairness. For instance, earmark 20% of future SDR allocations for the poorest countries, contrasting the 2021 $650 billion distribution based on quotas.
In IMF Surveillance: Focus on countries with significant external reserves or systemic influence, ensuring an even-handed approach.
2) Mandate:
Surveillance of Capital Flows: Monitor capital movements closely to manage economic stability.
Role of a Global Central Bank: Use SDRs to manage global liquidity, effectively functioning as a global central bank.
Role of Lender-of-Last-Resort: Explicitly recognize this role, providing security against capital-flow fluctuations.
3) Governance:
Strengthen the Decision-Making Role: Empower the International Monetary and Financial Committee (IMFC) for enhanced decision-making.
Review the G20’s Composition: Ensure universal and equitable representation. Example: Steps taken under India’s G20 presidency for broader representation.
Terminology used:
Special Drawing Rights (SDR):
The SDR is an international reserve asset created by the IMF to supplement the official reserves of its member countries.
The SDR is not a currency. It is a potential claim on the freely usable currencies of IMF members. As such, SDRs can provide a country with liquidity.
A basket of currencies defines the SDR: the US dollar, Euro, Chinese Yuan, Japanese Yen, and the British Pound.
Palais Royal Initiative:
The Palais-Royal Initiative is a response to the global financial crisis.
A group of 18 experts wanted to understand if the international monetary system caused the crisis. They met at the Palais Royal in Paris. They wrote papers and sought advice from institutions like the IMF. They made proposals to improve the global finance system.
These were given to the G-20 president in 2011.
The initiative is private and aims to promote international cooperation.
Question for practice:
Critically analyse the role, potential and performance of the International Monetary Fund in tackling the challenges in the global economy.
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