The Hindu Business Line : IMF – in search of a role

It is time the IMF rediscovered its role not only of advising developing countries but also of addressing issues that are pertinent to the largest stake-holder, the US, says S. VENKITARAMANAN.

Recent reports that the IMF is contemplating sale of part of its gold reserves brought to memory the Indian crisis of 1991, when IMF authorities insisted on India’s sale of gold as a precondition to grant of assistance.

How the mighty have fallen! The IMF was a venerable institution in earlier days. It does not seem appropriate now to point fingers at what caused this state of affairs.

Perhaps, it is the growth of the developing economies, which once used to be the principal clients of the IMF and brought lending business to its door-steps.

The IMF’s role as a lender of last resort to countries in distress, such as Russia, China and India, has been reversed because these countries themselves have become the source of capital for the so-called rich countries.

This reversal of roles has meant that the income of the IMF is under great stress and the IMF itself is facing problems of ‘structural adjustment’, calling for reduction of staff and administrative expenditure, a remedy it prescribed in a grandiose manner to countries such as India and Indonesia, when they were in distress.

Falling revenue

The number of borrowers from the IMF has declined sharply — from 70 in fiscal year 2000 to 40 in 2007. Consequently, the total amount of IMF credit lending outstanding bill in March 2007 fell to SDR 11.9 billion from SDR 70 billion in 2000.

In the foreseeable future, as Dina Khatkhate points out in an exhaustive article in the Political & Economic Weekly dated April 5-11, 2008, this amount will fall further. So, the IMF has to look for other means to raise funds to support its expenditure.

The revenues of the IMF have fallen below 50 per cent of its expenditure. The organisation has set up a Monetary and Financial Committee to examine how the objectives enunciated by the IMF Board can be carried out. Something more than merely a retooling is required if the IMF is to remain relevant in the new global economic and financial environment.

While the sale of gold by the IMF is itself a sign of depleted fortune, it does not seem to be correct to postpone the structural reorganisation of the global financial architecture. The IMF is no longer regarded as a credible institution for advice and assistance to developed and developing countries.

Its deplorable failure in even warning against the emergence of the sub-prime crisis in the US shows the failure of surveillance. Not that the US financial authorities would have listened to advice from one of their creations, although sanctified by an international appellation.

Suggestion ignored

The IMF’s new Managing Director, who came from a liberal environment in France, has admitted that he has been literally learning on the job.

The circumstances in which he was elevated to this new office derived from the tradition that the IMF’s Managing Director has to be from Europe. This is in exchange for the convention that the World Bank would be under an American.

The point at issue is not who governs the IMF, but how it is governed. The quota system still remains fraught with undue precedence for the countries of the then richer half of the world — the US, the UK, Italy, Canada, France and Germany. China, India and other countries with increasing might in the financial markets do not have an adequate say in the management of the IMF!

The previous Managing Director as well as the present one had indicated their intention to amend the structure to give due representation to the emerging power centres of the world.

At an earlier stage, I had pointed out in an article in these columns that the obvious solution to this problem of imbalance is for the Asian nations to create an Asian Monetary Fund, an initiative suggested at the time of the Asian crisis by a Japanese Finance Ministry official.

The IMF authorities at that time, supported by the US Government, had waged a campaign against the proposal, which died an unnatural death.

If such an institution, an Asian Monetary Fund, had come into being, it would have ably performed a more constructive role today in global finance and presented alternatives to the solutions proffered by the veterans of the IMF. The IMF is facing an identity crisis. It has been thinking of offering investment service to countries of emerging Asia. To what extent it will be a better investment manager than the experts who have rendered their advice currently to various Asian countries is a debatable question.

Ultimately, the IMF lacks experience in managing investments of the trillions of dollars that China, India and Japan have. It would be foolhardy for the IMF to strive to find a source of income through offering investment advice to the Sovereign Wealth Funds of Asia or of Saudi Arabia.

Genesis of IMF

The genesis of the IMF was in the days of Lord Maynard Keynes, based on his experience of the Great Depression. He had felt that the “beggar my neighbour” policy of countries deploying currencies in order to make their own exports cheaper was internationally counterproductive. Keynes, therefore, thought of an International Monetary Fund that could settle various exchange rates between countries subject to following their domestic policies in line with the macroeconomic fundamentals.

His suggestions at that time included the creation of an international currency, Bancor, which unfortunately was turned down by the US, since the US had then, as now, a strong voice in formulating IMF policies.

The regime of fixed exchange rate came to an end in 1971 when the US opted out of its commitments. Floating exchange rates became the paradigm to be followed from then on.

The experts in the IMF have been arguing against devaluation of currencies such as Chinese renminbi and the Japanese yen, although practical experience has shown that it is these policies that have enabled the Asian countries to grow their exports and their economies.

Setting right the imbalance

The crisis in the US financial market has set IMF experts thinking about what is to be done. It is unfortunate that the IMF has no significant ideas to put forward to solve the present crisis.

The solution perhaps lies in the US setting right the fundamental imbalance between savings, on the one hand, and consumption and investments on the other. The US has been living beyond its means. Its currency has been over-valued for years. It is only now that it is finding its level.

While the IMF had been recommending that China revalue its renminbi, its advice to the US to set right its current account and budgetary imbalances had fallen on deaf ears. This is a matter that is beyond the purview of technical experts.

Ultimately, the political economy’s adjustment is a difficult one, be it the US or China or India.

It is to be hoped that after the current electoral battles are over, the US will settle down to addressing the economic questions that face the richest country and affect the rest of the world.

It is time the IMF rediscovered its role not only in advising developing countries but also in addressing issues that are pertinent to the largest stake-holder, the US. Ultimately, whether the IMF succeeds or loses is material to the rest of the world.

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