IMF: too soon to smile?
Managing Director of the IMF Dominique Strauss-Kahn has reasons to celebrate. But is it too soon?
The International Monetary Fund seems to be recovering from the existential crisis it suffered last decade. The fund has been increasingly busy in recent months as various countries such as Hungary, Ukraine, Pakistan and Iceland found themselves in need of financial aid. The economic downturn has called the international organization back into action after years of declining relevance and marginalization. It has lent more than $50 billion since the outbreak of the crisis and still has far more to offer in its kitty. But not more than five years ago the situation was very different: the IMF was agonizing for new borrowers and already looking into cutting back staff.
Despite its sudden bonanza, the IMF still caries a stigma aroused in the end of the 20th century with the mismanagement of several rescue operations in emerging markets. From the countries that turned to the fund recently, few did it willingly. Even in the midst of the worst global recession since the crash of Wall Street in 1929, most governments considered recoursing to the IMF’s headquarters in Washington as the last alternative. While Iceland tried calling Moscow first, Pakistan took its chances with Beijing. But since beggars cannot be choosers, politicians saw no other alternative but to take new loans from the fund.
The fact is that many emerging economies regard the IMF as a dependable source of cash. During the Asian financial crisis of 1997-98, the medicine prescribed by the fund was a bittersweet pill to swallow. Instead of improving, the economic situation in Thailand, South Korea and Indonesia got progressively worse after the IMF intervened. Tightened to the bailouts was a set of structural reforms and demands for stringiest fiscal and monetary policies to help pull the troubled countries out the crisis. The aim was to restore the banking and financial systems and avoid capital outflows in the region. But the opposite happened. Money continued to flee from Asia and creditors kept losing confidence in a sustained recovery. In 1999, the catastrophic effects of the professed ‘structural adjustment package’ (SAP) led the IMF to admit errors in the handling of the crisis.
Similar situations occurred in Brazil and Argentina around the same period. Once more the International Monetary Fund evoked rage and criticism after the negative impacts of its anti-Keynesian impositions in those countries. The facts offered fertile ground for many to accuse the IMF to be an instrument for a new kind of colonization. A slump in legitimacy ushered most of the fund’s borrowers to steer clear their debts as soon as they could. In 2006, Brazil and Argentina paid the entire $25 billion of their outstanding loan ahead of schedule to prevent the institution from interfering in their economies again. Anticipated repayments and the lack of new credit lines shrank the fund’s loan book by 95 percent in the three years up to 2006. Its kitty went down from $60 billion to mere $3 billion.
Established in 1944 at the Bretton Woods Conference, the IMF was originally intended to promote international financial stability by avoiding a spiral of currency devaluations triggered in the last stages of the Second World War. It was also meant to facilitate the growth of world trade and serve as a “lender of last resort” to its members if they ever ran into financial trouble. In a world of fixed exchanged rates and relatively limited supply of private capital, this system seemed to make sense. But more than 60 years later, this notion has lost significance. Industrialized countries have not borrowed from the IMF since 1980 and many accuse the fund of neglecting its responsibility to watch over for exchange rates, especially in the case of the renminbi. Developing countries almost completely lost their trust in what they dub as an “unrepresentative” institution.
All these problems threw the IMF into an existential crisis and left many questioning its relevance and acting power in the global economy. Some of its meaning was revived by the financial crisis, but not all can be credited to it. The changes implemented by its current managing director, Dominique Strauss-Kahn, have also been contributing for the retrieval of the institution. His biggest sign of triumph was the increase of the IMF’s kitty to $750 billion, almost half of his ambitious goal of $2 trillion. A big chunk of the money came from America, Japan and Western Europe. But in a boost to the fund’s legitimacy, countries once victim of its mistaken interference – including Brazil – have agreed to invest in its first-ever bond issue. The fund has also abandoned its “one-solution-fits-all” approach to crisis-mitigation and has become more responsive to conditions in recipient countries. In the words of Strauss-Kahn, the IMF is now more centered on “fixing crises, not the world”.
Much of these initiatives were thought to redress the grievances of the past. With more money on its balance sheet, the IMF can persuade emerging countries more easily to rely on its resources in case of future crisis – instead of having them seat on vast amounts of foreign reserves. This money could then be unleashed for investments in health, education and other sectors vital to the development of poorer countries. If the IMF achieves success in branding itself as a “world sovereign-fund”, it would play a central role in reducing global imbalances. Yet this too is a difficult task, since the impacts of the fund’s policies is what led many countries to stockpile foreign currency in the first place.
The underlying problem of legitimacy can only be addressed with a reform of the funds quotas to give emerging economies more voting power. Like other institutions born on the aftermath of the Second World War, the IMF carries a cursed inheritance of misrepresentation in its decision-making processes. The United States alone holds 17 percent of the voting quotas, which gives it the right to veto any important decision that requires 85 percent of majority. With the increasing role of emerging counties in the political and economic decisions made in the global arena, it is unrealistic to think that an institution that provides inadequate representation of this group can be of any significance. China and Brazil, for instance, have smaller voting quotas – less than 2% each – than the Benelux countries. However, their share of global GDP is far more substantial. Moreover, a system of constituencies prevents large developing countries or the EU, for example, to vote collectively for a common cause.
One round of changes in the quota system has already been agreed, but not yet implemented. Currently more than three-quarters of the 184 members of the IMF are not directly represented on the Board of Executive Directors. Many not even have their own staff working in the organization. The G20 has asked the IMF to complete its next quota reviews by the beginning of 2011. But to please the majority – that means, emerging and least developed countries – rich nations would have to give up more power than they may be prepared to do. The prognosis is straightforward, though. Without some kind of balanced representation that grants legitimacy to its writ, the IMF will continue to be run by the interests of those who are – ironically – its smallest group of clients: the rich countries. As legitimacy and power go hand-in-hand, the fund needs revamped authority if it aims to become a powerful institution of financial cooperation in the decades to come.
All this process has to be underpinned by transparency. In a report issued by the Independent Evaluation Office of the IMF earlier this month concluded that the Fund governance structure is inadequate. The document also presented the results of a survey conducted with 32 civil society organizations. There was a general consensus among respondents that the current channels of communication between the organization and society are scarce and that formal consultation is practically nonexistent. Many also urged the organization to implement a formal process in which external stakeholders can confer with the IMF before any policies are put into effect. Another common complaint was directed to the lack of transparency in the Board processes, which makes it almost impossible for civil society organizations to judge whether their views are taken into account in deliberation processes.
Put it short, there are plenty of ways to go about changing the IMF, but not many when it comes to deeply transforming its constitution and making it truthfully powerful and legitimate. Much has already been done on the surface since Strauss-Kahn took office in 2007, and it has brought positive results. However there is a long way to go before the fund emerges as a respected multilateral institution by all nations (especially the poorest). Without an overhaul to the way it is governed, the same fundamental problems that pushed the fund to the boundaries in the last decade will most likely come back – and the consequence might be the relapse into another existential crisis.
