Internationalism on the mend

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The International Monetary Fund should engage industrial and emerging markets more. Not only do they constitute a natural and legitimate forum for much-needed multilateral dialogue, but also act as a more effective one.

DR RAGHURAM G. RAJAN, Economic Counsellor and Director, International Monetary Fund. His suggestions of reversing the retreat from multilateralism and reviving interdependence strike the right note.
DR RAGHURAM G. RAJAN, Economic Counsellor and Director, International Monetary Fund. His suggestions of reversing the retreat from multilateralism and reviving interdependence strike the right note.

G. Srinivasan

There is a lively debate going on about the reform of the International Monetary Fund (IMF), an institution no longer looked upon with dread by emerging market economies such as India.

Critics had in the past railed against the Fund for being asymmetrical in its approach by not prescribing any conditionalities for rich industrial countries and not undertaking surveillance of the exchange rate policy of its members as much as it did for the developing world.

In the little over six decades since the first Bretton Woods conference, when the Fund was established, it has come a long way.

In what was a spirited defence of the Fund, its Economic Counsellor and Director of Research, Dr Raghuram G. Rajan, shared his personal thoughts at the Stern School, New York University, yesterday.

Dr Rajan outspokenly admitted the dichotomy in industrial countries publicly pressing for transparency and candour, while discouraging the Fund from holding a press conference to disseminate its findings at the end of a surveillance mission.

The Fund's focus

Dr Rajan deplored the retreat of multilateralism everywhere, citing the revival of beggar-thy-neighbour policies, except that it is now also on the capital account.

"It is okay for firms in industrial countries to take over firms in emerging markets, but God forbid that the emerging markets contemplate the reverse. Then all sorts of `non-tariff' barriers start emerging including understandable, but ultimately specious, concerns about national security and even concerns about etiquette," Dr Rajan said, without directly referring to the recent furore over Mittal Steel's aborted attempt to take over Arecelor.

To Dr Rajan, the Fund's surveillance focuses on two related issues the sustainability of a country's policies and their external effects.

Even the world's biggest debtor, the US' economic policies, are being carefully followed, not only by the Fund but also by the rest of the world.

"This is why the Fund has been so vocal about the problem of global current account imbalances and the need for the US to increase savings in a measured way."

Dr Rajan hastened to add that the current account surpluses and reserves build-up that have so fortified emerging markets, are also unsustainable.

He rightly said that the question every country has to ask itself is: "Am I prepared for the day the US consumer finally decides to hang up the shopping bag and save?"

Stretching the point further, Dr Rajan said it is concerns about sustainability and external effects that motivate the Fund's advice to China. China is becoming overly reliant on external demand.

Its exchange rate policy distorts the pattern of investment even while banking on consumption and prevents the central bank from using interest rates as an effective tool of policy, he said.

Corporate and financial sector reform is probably the key to medium-term sustainability in China, allowing that exchange rate appreciation must be an integral part of the strategy, Dr Rajan noted.

While the Fund has heightened awareness of the need for adjustment with everyone, reciting its


on the policies needed to deliver smooth adjustment, movement on the policies front has been limited.

This is not because "we are asking countries to do anything against their long-term interests" but the problem is that the policies have political costs in each of the countries concerned and, with multilateralism at ebb, "no country deems the common benefit a sufficient offset", so regretted Dr Rajan.

Influencing policies

Summing up the dilemma facing the world, Dr Rajan said that as industrial countries recognise they are affected by policies in advanced emerging markets such as the BRICs (Brazil, Russia, India and China), they want to be able to influence those policies.

But the advanced emerging markets no longer need funding at least for the foreseeable future.

Dr Rajan said, at the same time, the emerging market economies too want to be able to influence the policies of the industrial countries, for these have serious external effects.

Hence, his valid proposal that the Fund can re-engage both groups more.

It would not only be the natural and legitimate forum for much-needed multilateral dialogue, it would also be a more effective one.

The obvious countries to re-engage with first are the advanced emerging markets. As their reserves fall, they might well want to re-engage with the Fund, but on their own terms.

Dr Rajan hoped that with advanced emerging markets more engaged, perhaps the industrial world will also see more value in the Fund as a forum for dialogue, and the spirit of internationalism would be rekindled once more.

Dr Rajan's suggestions of reversing the retreat from multilateralism and reviving the spirit of inter-dependence as exemplified by post-War institutions such as the Fund, deserve a shot in these trying times.

(This article was published in the Business Line print edition dated March 9, 2006)
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