Gordon Brown seeks sweeping reforms to give IMF global 'surveillance role'

PM plans to make G20 summit in London a turning point in remaking global economic order

• Patrick Wintour, political editor
• guardian.co.uk, Monday 16 February 2009 19.46 GMT
• larger | smaller

Gordon Brown is making reform of the international monetary fund, its governance, funding and powers of surveillance, the centrepiece of a 45-day diplomatic drive in an attempt to make the G20 summit in London a turning point in remaking the international economic order.

Brown, in alliance with the Australian prime minister Kevin Rudd, wants to increase the funding of the IMF, speed up a review to give China and India clearer voting rights, and also give the fund powers to direct nation states to respond to its surveillance reports. He also wants to give the G20 a permanent secretariat, so making it a powerful body overseeing finance and largely eclipsing the G8.

The prime minister is meeting the IMF managing director, Dominique Strauss-Kahn, on Wednesday, the pope on Thursday and the Italian prime minister, Silvio Berlusconi, on Friday, before joining a mini-summit of European G20 members France, Italy and Germany in Berlin hosted by Angela Merkel, the German chancellor. No 10 angrily denied suggestions that Merkel is lining Brown up to be a new IMF super-regulator. Some officials believe a cabinet member leaked the suggestion.

Britain is chairing the G20, with a summit in London on 2 April to be attended by Barack Obama, and Brown is using the event to advance his long-nurtured plans to reform the IMF. It is a huge test of his diplomatic skills as he seeks to weld conflicting goals and ensure practical proposals emerge rather than rhetorical bombast that fails to assure the markets.

On the IMF, Britain wants to expand its existing lines of credit, so giving "emerging market economies" an opportunity to contribute. Brown has also considered a loan or bond facility funded by Arab states, Japan and China.

He and Rudd also want allocate additional special drawing rights (SDRs) to the IMF's newer members, as agreed in 1997, so giving them access to foreign exchange. SDRs are an official international reserve asset issued by the IMF to its members, who can exchange them for freely useable currency. Strauss-Kahn has called for the IMF's resources to be doubled $500bn. Brown is also interested in the IMF supporting – through expertise and financing – the creation of a network of national "bad banks" to take on toxic assets.

Finally, he wants to give the IMF a strengthened mandate to provide early warning of weaknesses and advice on remedial policies, similar to those provided by a central bank.

At a seminar on the G20 summit last week Brown argued: "The world lacks a proper early warning system. There is the Bank for International Settlement, there is the Financial Stability Forum, but we have never given anybody sufficient teeth so that their views are treated so seriously that people will immediately have to act when that early warning is given. We still lack the means for financial supervision." The International Monetary Fund, he said, "cannot have a role that is simply commentating on the global economy, it must have a surveillance role that is effective".

He added: "If people feel that the IMF is simply the representative of the richest countries with very little say for the poorer countries, if people think that the World Bank is similarly constructed, then people are going to either seek to have other institutions or going to reject the existing institutions, and of course the danger of that at this time is protectionism."

The aim appears to be develop a "grand bargain" in which there is a greater role for emerging economies such as China in the IMF, and easier access to its financial assistance, in exchange for such countries playing by the global rules and not trying to build up surpluses and reserves as an insurance policy.

Other issues to be addressed include whether hedge funds and shadow banking are brought within the remit of regulation and Brown has also asked Pascal Lamy, the head of the World Trade Organisation, to compile a report for the G20 on the threat posed by protectionism.

Brown now reckons that unless new credit lines are opened, as many as 100 million people will be driven into poverty as a result of the global financial crisis. He has been struck by figures from the International Institute of Finance which said two years ago net flows to the emerging markets were nearly $1 trillion, but that in 2009 this figure will be $160-170bn – a 700% fall in two years.