More firepower, less force for IMF: James Saft

April 19, 2012

By James Saft

(Reuters) – The International Monetary Fund may emerge from its meeting this week with more firepower but less force.

While the fund is looking on track to add at least the $400 billion it has argued it needs to deal with the potential fallout from the euro zone crisis, it will have to cope with a U.S. which is partly sidelined by domestic politics during a period of rising international economic tension and protectionism.

Even the $400 billion is a downgrade from a $600 billion figure bandied about earlier. IMF Managing Director Christine Lagarde has been busily putting a positive gloss on the shortfall, arguing that matters have improved substantially in Europe since the bigger figure was suggested.

Japan, Norway, Denmark and Sweden have pledged a combined $86 billion but the IMF will have to make shift without additional money from the U.S., where ponying up more cash during election season is considered politically unwise.

That is causing difficulties in raising cash from emerging market states, which want more power over the IMF to go along with bigger financial commitments, a step requiring U.S. congressional approval which simply isn’t going to happen this year.

None of this is wrong – it’s right that the emerging world contribute more and that it have a bigger say. It is not the justice of the change in arrangements which is at issue; it is the force and ability of the institution to be effective with a hamstrung U.S.

That’s because the IMF’s real power is not in its bankroll, which truly never can be big enough to cope with the kind of damage that might result from a euro zone exit by a major player, but rather in its cohesiveness. To borrow a concept from Ian Bremmer of Eurasia Group, this illustrates the difficulties for the IMF of operating in a G-Zero world, one without a truly dominant power. here

This is not simply about coordinating without a dominant leader, which of course will be difficult, it is about the inevitable ways in which interests will diverge, sharply. A dominant state, like the U.S. 20 years ago, will find it in its own interest to spend some of its capital (monetary and otherwise) on making longer-term investments in a workable global economic accommodation. If power is spread more equally a leadership vacuum may develop, with none of the major players feeling rich enough and invested enough to drive policy and take political heat for it at home.


So far, the post-financial-crisis landscape has been relatively free of hard protectionism, especially given the depth of the difficulties and the lackluster and halting recovery. That may be changing.

Exhibit A is Argentina’s outrageous move to nationalize most of Spain’s Repsol’s stake in oil company YPF SA. Given Argentina’s dodgy track record – it has already seized pension assets and its economic data is widely disbelieved – this is not entirely surprising, but it is alarming.

Sadly, it is not just Argentina. Brazil has worked hard to weaken its currency, which is up by nearly half against the dollar since 2007, and has introduced a series of measures to protect domestic industry.

The rise of such measures in Latin America, always justified as being a reaction to protectionism elsewhere, was a main focus of attention at the Americas Summit in Colombia last week.

And while things have been relatively quiet on the currency war front between the U.S. and China, the U.S. has been more aggressive in bringing trade actions against what it calls unfair Chinese competition and China has been increasingly pointed in its responses. As the U.S. election heats up, expect to see this particular battle come out more into the open. It may simply stay a matter of political theater, but it also could easily harden into something more dangerous and destructive.

The truth is that there are huge constituencies all around the world which each want to export their way out of the current malaise, as is the case for Europe and the U.S., or which want to continue to see their standards of living close the gap with the rich world at a satisfying clip, as in China and Brazil.

Unless life is discovered on Mars and they happen to want cars, iPads and flat-screen televisions, this simply is not going to happen. What is going to happen is rising tension, at the least, and a destructive wave of protectionism, at the worst.

That worst outcome is more likely, and the IMF’s ability to head it off is less, because we live in a multi-polar world. That reality is far more important than an extra $400 billion or even $600 billion.

(Editing by James Dalgleish)

(James Saft is a Reuters columnist. The opinions expressed are his own)

(At the time of publication, Reuters columnist James Saft did not own any direct investments in securities mentioned in this article. He may be an owner indirectly as an investor in a fund. For previous columns by James Saft, click on)

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