Opening up the IMF country club
The International Monetary Fund has been the comeback kid of the financial crisis. Since the meltdown, it has been lavished with favors, including a trebling of its lending capacity and many new responsibilities. The weekend’s G20 meeting set the seal on a Lazarus-like revival.
By agreeing to a bold shift of voting power to dynamic emerging markets, the G20 offered the IMF its best guarantee of continued influence and power. This is good news for the global economy.
The decay of the IMF before the financial crisis was in no one’s best interests.
The fund had two big problems. First, the IMF’s war chest had shrunk sharply relative to global capital flows. This meant that a large emerging nation could no longer rely on the IMF to bail it out in an emergency.
Back in 1990 the stock of global cross-border portfolio investment was just $171 billion while the IMF had the capacity to lend $36 billion. By 2008 cross-border portfolios had ballooned to $3 trillion but the fund’s coffers had expanded to just over $200 billion.
In other words, the volume of hot money had expanded some 18 times and the IMF capacity to offset it had increased just six-fold.
This lack of IMF muscle was concealed by the buoyant world economy between 2002 and 2007. Indeed, demand for the IMF’s crisis loans plunged to its lowest level in decades. With interest revenues slumping, the IMF forecast a loss of $400 million a year by 2010 and announced the largest layoffs in its 65-year history.
The financial meltdown has proven the need for a strong global lender. Global leaders have been right to increase the resources at the fund’s disposal — currently around $750 billion.
This increase alone may in itself have helped calm financial conditions in many emerging markets. Ideally IMF resources should be increased further to around $1 trillion.
The second problem was one of legitimacy, and it was this issue that the G20 sought to tackle head on at Pittsburgh. The IMF had a well-deserved reputation as a country club.
For example, Belgium and the Netherlands together have a much larger voting share than China — despite the fact its GDP is almost three times the size of the two European nations’ combined. During the Asian financial crisis, the IMF appeared to confirm fears that it was dominated by a coterie of wealthy nations. Governments asking for help were subjected to humiliating conditions.
The loathing of the fund added to the incentive for developing countries to accumulate foreign exchange reserves — a form of “self-insurance” against financial crisis. This was costly for them, and added to global imbalances by keeping the dollar artificially high.
The 5 percent shift promised by the G20 toward fast-growing emerging economies is a big step in the right direction. Once completed, developing nations would command close to 50 percent of the voting power.
With a greater say, emerging nations will be less fearful that they will be forced to get down on bended knee if they need IMF help.
Lenders seldom inspire great affection. Even so, it is important to ensure the IMF is less reviled by so many of its members.
Mistrust of the IMF was not the only reason for reserve accumulation, or even its main one. Most reserve accumulation was part of an effort by developing countries to keep their currencies competitive and so promote exports. But shaping a more representative IMF is an important step toward a more balanced global economy.