IMF Blues, a Radical Proposal

The Fund used to throw one of the best Christmas Holiday parties in town. The oysters were good and it was fun to swing with the rhythms of the Fundamentals. But last year the party was not so good (oysters were the first victims of budget cuts). This year, with looming cuts in personnel and benefits, the atmosphere is likely to be gloomy.  

Fund-haters are excited, it’s payback time. I don’t share this view. The Fund has been useful in the past and has an important role to play in the future. Although I sometimes don’t share their views, Fund economists are dedicated, hard-working, and high-quality.  (Disclaimer: some of my best friends work at the Fund.)  

The Fund’s budgetary and legitimacy problems are linked. Some large emerging market countries decided to prepay the Fund because they disagree with its policy advice and feel that they are not properly represented in the Board of the Institution.  

What is to be done? The standard answer is downsizing. This is what the Fund’s large shareholders want. I have another proposal.[i] You probably know that most international civil servants (like myself and Fund staff) don’t pay income taxes. I suspect that most readers think that we are getting an unfair subsidy.  In fact, this is a subsidy given to the institution and not to the employees.  If an employee does not have a tax-exempt status, the institution compensates the employee for his or her tax liabilities.[ii]  

But who are the international civil servants who pay income taxes? Well, mostly US citizens. The US is the only large country that does not grant tax-free status to its citizens who work for international organizations.  A Fund staffer who is a US citizen costs about 50 percent more than an, otherwise identical, employee from, say, Canada.[iii]  

Therefore, the Fund could reduce its costs by laying-off US citizens and replacing them with non-US citizens. I am not advocating such a policy.  

An alternative would be to ask the US to behave like all other countries and grant tax-free status to its citizens who work for international organizations. This would be better (right now, the international financial institutions are a mechanism through which poor countries finance the US government).[iv] However, I suspect that it will be a cold day in hell before Congress will grant tax-free status to international civil servants.  

Before getting to my proposal let me say something about legitimacy. IMF votes are allocated with a somewhat complicated formula, mostly based on GDP, trade, and volatility of capital flows. Developing countries feel that this formula does not give them enough weight and suggested alternative ways to allocate votes. I tend to agree with the G24‘s view. However, the G24 proposal faces strong opposition from small European countries (with the current system Belgium has 2.10% of the votes and Brazil 1.4%) and, like almost any formula suggested so far, it will not reduce the US quota that, with 17 percent of the total votes, gives the US veto power on major policy issues.  

So, here’s my proposal. The tax exemption granted by most countries should be explicitly recognized as a subsidy to the Fund and included in the formula used to allocate IMF votes. For instance, 50 percent of votes could be allocated with the G24 revision of the current formula and the remaining 50 percent according to the tax exemption subsidy. The US would get a lot of votes in the first half and zero votes in the second half (it could get the votes back by granting tax exemption to US citizens). Developing countries that have a large number of staff members and give them tax exemption would get a large share of votes (this would have the additional advantage of providing some sort of compensation for brain drain).  

Oh, how does this solve the budgetary problems? Well, if it is true that the Fund is losing clients because emerging market countries feel underrepresented, giving these countries more power will also increase the number of customers.  

PS Besides feasibility, I am aware of two problem with my proposals: (i) it may increase political pressure on the composition of the staff; (ii) some African and Asian countries with a small staff will become even more underrepresented.   


  

[i] I focus on the Fund, but my proposal can be applied to all international financial institutions (The World Bank, The IDB, The ADB, ….).
[ii] When the Fund wants to hire somebody it offers a salary net of taxes and then pays the gross equivalent. Consider two employees with similar skills and qualifications who earn a net annual salary of $100,000.  The first employee does not need to pay income taxes and the second is subject to an income tax of, say, 30%. Then, the institution will pay $100,000 to the first employee and $150,000 to the second.
[iii] The difference is less than 50 percent because international staff gets expatriate benefits which do not apply to US citizens. The value of these benefits depends on family structure and country of origin, but, in general, is a fraction of the tax refund given to US citizens. 
[iv] The Fund earns its income by lending money to developing countries. Interest paid by developing countries finances the staff’s salaries and about one third of the salaries paid to US citizens goes to the IRS. It is not much money, but it’s bizarre. 

3 Responses to "IMF Blues, a Radical Proposal"

  1. mark turner   December 13, 2007 at 9:12 am

    My idea of a radical proposal would be to ask the IMF to win clients by offering them attractive deals and avoid the layoffs entirely. In this age of SWFs there’s a lot of competition amongst finance bodies to manage country reserves. Perhaps this competition will soon show its healthy head in the world of “sovereign debt funds”, too.By the way, what’s so wrong with saying “Christmas” anyway? Political correctness has its uses but does go a bridge too far sometimes. The 25th is Christmas day! Merry Christmas to you Ugo and to all. (Meanwhile i’ll be at the local Intihuatana for the celebrations on the 21st, too. All invited.)

  2. Anonymous   December 13, 2007 at 10:33 am

    Is this a joke or a true proposal?

  3. Ugo   December 17, 2007 at 7:46 am

    Thanx for the comments. Mark: I am not sure what is attractive. For sure the Fund is more attractive at time of crisis than right now. About PC, deleting Xmas and substituting with holyday was an attempt to make a little fun at PC-ness. Obviously it dit not work. Anonymous: I am not sure whether it is a true proposal (I am aware that my idea has several limitations). However, all the things written in the post are true and serious. So, it is not a joke.