The Hindu Business Line : Global imbalances: What can the IMF do?

While the IMF has been truly a reservoir of economic information and analysis, it has been dominated too long by the concerns of the West. And if the Fund cannot be reorganised to take account of Asia's legitimate rights, it is time to revive the concept of an Asian Monetary Fund, says S. VENKITARAMANAN.

THE IMF Managing Director, Mr Rodrigo de Rato... Will he use his powers to ensure greater equity?

Last week saw the IMF annual meet in Washington. It witnessed what has been termed a breakthrough, in the sense that the IMF has gained a role in addressing the issues of global imbalances — mainly the rising and high US current account deficit.

The IMF's Managing Director, Mr Rodrigo de Rato, has been authorised to undertake formal multilateral surveillance for countries whose policies have an important bearing on others.

The IMF's Steering Committee endorsed Mr de Rato's proposal in this regard. It also significantly endorsed his proposal to find more votes at the Fund for countries whose economies have grown rapidly.

These are just proposals now. They need to be endorsed at the IMF annual meeting, to be held in Singapore in September.

What is more significant is that the Finance Ministers, who met the Steering Committee, warned the global policy-makers to remain vigilant against an upsurge in inflation amidst strong growth in world output. They voiced fears that persistent global imbalances pose dangers for the world economy.

Pressure was, of course, kept on China to revalue its remninbi so that its exports to the US may become costlier and thus induce a reduction in the US' imports from China.

Obviously, China does not quite see it that way. Its central bank Governor is reported to have declared that China's surplus is not too bad for either China or the US.

It helps the US get its goods cheaper and also supports its debt market at low rate of interest. What is all the more shocking about this seems to be his decisively conveyed critique.

What effect on US?

The International Monetary Fund can, of course, study the economies of countries such as the US, its budget deficit and current account imbalance. But as long as the US does not borrow from the Fund, what sway will it have on the US' policies?

The IMF has been conducting periodic consultations with countries like the US, and disclosing its results. It has called on the US, for instance, to decrease its budget deficit, increase its savings ratio. It has also called on China to revalue its currency. But its exhortations have so far fallen on nearly deaf ears.

Whether holding multilateral conferences will help solve the problem, given IMF's lack of leverage at the negotiating table, is doubtful. The IMF's being given more powers to have surveillance is like empowering a toothless tiger.

Considering that the Fund is a 20th Century dream that fulfilled its role in its early years, can it be revived to do its job of global watchdog when private capital flows tend to dwarf the resources at the Fund's disposal?

China's reserves running at nearly a trillion dollars alone can put to shame all that the IMF can muster.

It is obvious that if the IMF is to survive as more than a talking shop, it should get some teeth, which is difficult, given that its resources are relatively small in comparison to the surpluses of countries like China.

But it can make a beginning by redesigning its governance and making it more inclusive.

Recognise emerging Asia

It can give a higher share in power to such emerging countries as China and India. That is the most difficult part of the reorganisation of global financial governance.

Any reorganisation of the IMF that fights shy of giving China and India real power in its governance is not worth the effort.

Equally importantly, the notion that the IMF's Managing Director should have such a powerful say ignores the shift of economic dominance to the countries of Asia. The US and Europe have to recognise this historic shift in global power.

The US is the reluctant debutante in this power game. It does not want its voting power to go below 15 per cent, which is needed to block an IMF decision. It now has 17 per cent. Any reorganisation of voting powers to the Asian economies might have to be at the expense of the US. The real crux of the reorganisation of the IMF's governance centres on the distribution of the voting powers.

The time has come for discussing these issues of global financial architecture at another international conference, like Bretton Woods. That conference, initiated at the behest of an organisation such as the UN, can mark the beginning of a more democratic IMF and perhaps the World Bank also.

The time has come for India to take part in the quest for reorganisation of the global structure of finance. It is not sufficient to be satisfied with occasional compliments thrown at us from the high table of the rich — the governing circle of IMF.

While the IMF has been truly a reservoir of economic information and analysis, it has been dominated too long by the concerns of the West. It is time to convert it into a truly International Monetary Fund.

Asian Monetary Fund

The fragility of IMF's responses to crises was displayed most dramatically at the time of the Asian financial crisis in 1997-98.

There was a proposal at that time to establish an Asian Monetary Fund (AMF), initiated by a brilliant Japanese Treasury official.

With a little extra push, the idea could have really taken shape at the time since the IMF was ineffective in handling the challenge of the Asian crisis.

It was too much in fear of its masters in Washington to advance aid, in time, to countries affected by the crisis. When it offered aid, it was too late, and too little, to be effective.

The sums involved were well within the capacity of countries like China, Japan and Taiwan to manage. But, unfortunately, the American masters of the universe frowned on the idea and the Asian Monetary Fund did not come into being.

In the event the IMF is not reorganised in time to take account of Asia's concerns and legitimate rights, it is time to revive the concept.

That is the only way that the erstwhile masters will understand that power has really ebbed away from them.

Their feigned concerns that an AMF will not be so strict as the IMF with its client countries is so much nonsense. For, after all, the IMF itself has been guilty of being too soft with its own client economy, the US, with its rising fiscal and current account deficit. It does not seem to be appropriate for the dons of the IMF to say that a new AMF will be softer on its client state than itself.

It is obvious that the time has come to rethink IMF's mandate. But it has to be done by generating another Monetary Fund for the Asian region, governed by Asians for Asians. The source of funds can very well be from the reserves of Asia's central banks.

Surely, no credit market will look askance at the new Fund if it approaches the market for funds.

Considering that its constituents have an excellent credit rating and, above all, are flush with reserves, the new Fund will not have any trouble in raising resources.

All that it needs is for Asia to assert that it is free of the syndrome of Western dominance. Why waste time on reorganising a frail reed, the present IMF, when a new strong AMF can do the job for Asia, and for the world, far more effectively?

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