Is there any point to the IMF?
Institutions often outlive their usefulness. Since the end of the Cold War, NATO has often looked like an organization in search of a mission. Lately, the International Monetary Fund (IMF) has also seemed like one lost without a contemporary role.
The IMF is trying to reinvent itself as a global financial regulator or as a forum in which member states can hold mutual discussions about their banking, monetary and fiscal policies — a sort of World Trade Organisation (WTO) for finance.
Getting agreement to set up a major new international institution is difficult since sovereign states jealously guard their prerogatives and are reluctant to concede any authority to a supra-national body. But dismantling them when their original rationale has passed is almost as difficult:
- International institutions are so hard to set up there is a temptation not to waste the effort and keep them around to solve other, emerging problems, without having to start from scratch again. Not so much mission-creep and mission transition.
- Officials are good at coming up with new reasons for organizations to exist.
- In most cases there is no vocal constituency calling for obsolete institutions to be dismantled.
- Perhaps most important, institutions become a familiar and comfortable part of the international landscape, handy to keep around just in case they are ever needed again sometime in the next few decades.
Last year a number of European Bank for Reconstruction and Development (EBRD) shareholders questioned the future of the bank and asked for a review of its direction. In recent months it has reinvented itself as a crisis lender.
In many ways the IMF is a relic of a vanished world. Originally set up by the Bretton Woods Conference to promote orderly balance of payments adjustment between countries in a world of fixed exchange rates, the IMF and its members could not make the system work and it collapsed acrimoniously in the late 1960s and early 1970s.
So the IMF reinvented itself as a crisis-lending institution for developing countries and promoter of the laissez-faire, pro-trade and pro-privatization policies of the “Washington Consensus” across Latin America, Eastern Europe and Asia through the 1980s and 1990s.
Unfortunately, the Fund’s limited financial help came with such unpalatable conditions attached many of its best middle-income clients in Asia and Latin America vowed “never again” and decided to operate large balance of payments surpluses and accumulate sufficient foreign exchange reserves they would never again be forced to go cap in hand to it.
In some ways, fear of IMF conditionality contributed to the accumulation of global imbalances that lies at the heart of the current crisis.
BADGE OF DISHONOR
In fact, IMF conditionality became such a “badge of dishonor” that no self-respecting country wanted to be seen asking for advice, let alone taking the Fund’s money. With almost no takers for its services, the IMF’s income from lending dried up. The institution was been forced to lay off staff, and become little more than a prestigious think tank.
Not to be discouraged, the IMF is trying to get back into the game. The much-criticized conditions have been (largely) abandoned and the Fund is increasingly talking up its condition-free new lending facilities — which are generally available to those countries which don’t actually have a crisis, but might experience an irrational one in future, so this is a prophylactic.
Like an over-cautious banker, the Fund now prefers to lend large amounts of money to people who don’t actually need it.
But the Fund wants much more. In particular, it wants to become the premier venue for countries to discuss and coordinate their fiscal, monetary and exchange rate policies so that they take into account the external impact on other members and avoid the build up of destabilizing imbalances.
In the same way the WTO is a standing forum for negotiations and consultations among its members on trade, the IMF would like to do the same for fiscal, monetary and exchange rate policies.
The Fund wants to promote an exchange of ideas and the adoption of best practice (though who will define best practice remains unclear — until a year ago, financial deregulation was considered best practice).
Whisper it quietly, but in the same way WTO rules impose formal, treaty-based disciplines on what members can do affecting trade, the IMF might in the end have formal treaty-based disciplines on what members can do in finance.
In some ways, this would take the IMF back to its roots.
But the Fund never managed to impose significant disciplines on the policies of members. The problem is that it has never had leverage over the policies of surplus countries.
At Bretton Woods and after, the United States, the largest surplus country during WWII and in the aftermath, carefully ensured there were no binding disciplines (requiring currency appreciation or fiscal and monetary expansion) on the freedom of action of surplus countries.
Now circumstances have changed and the United States is the largest deficit country. U.S. policymakers have suddenly discovered an enthusiasm for regulating countries with surpluses.
But the basic problem remains: control over fiscal, monetary and financial regulatory policies is so central to the purposes of the modern state that no sovereign government, other than in circumstances of dire need, will willingly give them up or accept binding disciplines. Surplus countries are rarely placed in this position.
Unless the Fund can develop a compelling case for both surplus and deficit countries to accept compulsory adjustment, and tough multilateral surveillance with real disciplines, all the grand talk is set to remain just that.