Globalise Not!

Irony of the Pansy IMF

There's something highly ironic about the location of the International Monetary Fund's annual meeting next month: Southeast Asia.

With the 10th anniversary of the start of the Asian crisis approaching, the IMF is returning to the scene of the crime, so to speak. It botched its response to turmoil that began in Thailand, Indonesia and South Korea and shoulder-checked markets a world away. Its multibillion-dollar bailouts came with rigid policy requirements that worsened the crisis.

Yet the bigger irony is that the IMF is heading to Singapore, cap-in-hand, looking for a bailout of its own. It's not money the Washington-based institution needs; it's a mission.

Several years of global calm have left the IMF with a relevance problem. Healthy growth and greater liquidity in capital markets mean its well-trained, amply paid army of Ph.D.s have few financial brushfires to put out.

With participation in its loan programs at the lowest level in decades, the IMF is facing an identity crisis. Its loss of clout has been surprisingly rapid.

In 1994 and 1995, it extended nearly $18 billion to Mexico, followed by more than $35 billion to Indonesia, Korea and Thailand. After that, Argentina and Brazil kept IMF officials plenty busy. So did Russia, an economy that in the late 1990s was deemed too nuclear to fail. As recently as April 2000, the IMF had loan programs with 25 countries, worth nearly $81 billion; 11 of them exceeded $1 billion.

Today, it has programs of any significance with only a handful of countries. The IMF does its best to put on a good face. Managing Director Rodrigo de Rato was in Tokyo last week, doing just that. His basic retort to arguments the IMF is irrelevant is that making fewer loans doesn't reduce its role in the global financial system.

The reality is more complex. In recent years, more and more economies have blown off the IMF's prescriptions. Amid healthy global growth, IMF is more of an observer of global trends than an overseer of them. How can the IMF carry a big stick when it has so few carrots out there?

Asia still mulls creating a regional bailout fund that would further sideline the IMF. Getting out from under IMF programs drove some governments here to pay back their loans early. And clearly, Malaysia's move in 1998 to peg its currency wasn't the disaster the IMF feared. One wonders how many Asian nations, faced with another crisis, would turn to the IMF.

Even so, a question must be asked: is the IMF irrelevant, or merely waiting in the wings for the next global crisis? While it's probably more the latter than the former, the IMF needs to step up efforts to restore its clout.

The currency-reserve arms race that's swept Asia since 1997 is a clear sign of IMF distrust. Korea, for example, is sitting on $225 billion of reserves. Holding vast reserves is expensive and inefficient, and yet Asians are amassing ever bigger amounts. The IMF is often viewed as the global economy's fire brigade. Now, Asian nations want their own fire trucks.

If the IMF is indeed irrelevant, it's less because of its missteps than rising currency reserves. The thing is, if the Bretton Woods system hadn't been created after World War II, many governments and investors would probably be arguing for an IMF-like organization. It's not a perfect, efficient operation and it's made its share of mistakes, yet it's better to have it than not.

The IMF's phones could be ringing again if the U.S. dollar crash economists have predicted for years unfolds. The same is true if China suddenly spiraled into crisis or terrorist attacks slammed global markets. What if the energy-price doomsayers are right that crude oil is headed above $100 a barrel?

The IMF needs to work harder to stay relevant, though, and it should use its Sept. 19-20 meeting to do just that. An obvious way is to step up the process of changing the system by which it allocates voting shares to members. Given the trajectory of global growth, does it really make sense for China to have barely more IMF votes than Belgium and fewer than Italy?

Developing nations doing the most to affect global trends are vastly underrepresented, while European ones with little influence are overrepresented. Singapore offers the perfect opportunity to repair this growing inequity.

The institution that was the brainchild of economist John Maynard Keynes also should go further in reducing its surveillance on individual economies. After all, it's never been known for its ability to predict or prevent crises.

Rather than churning out mountains of reports on this nation or that one, a more panoramic view would help. The IMF should accelerate the shift toward tracking cracks in the global system and how they could affect economies.

Independence is part of it. The IMF really should be more vocal about the risks U.S. current-account and budget deficits pose to global stability. The same is true of China's rickety financial system and its controversial currency policy. It's not about doing the U.S.'s bidding and demanding China let the yuan rise. It's about exploring and explaining the risks of the issue.

Having a more collaborative relationship with members would bode well for the IMF's future. Of course, so would having more borrowers. Without them, the IMF has few ways to influence economies doing the wrong things. The IMF sure does have its work cut out in Asia next month finding ways to stay relevant.

Technorati Tags: IMF, AsianCrisis, and Singapore.

posted by they lied @ 8:31 PM Comments: 0