Humbling the mighty

All Indian foreign ministers go off to annual meetings of the International Monetary Fund in Washington armed with a wish-list of reforms...

All Indian foreign ministers go off to annual meetings of the International Monetary Fund in Washington armed with a wish-list of reforms. Yashwant Sinha is no exception. But whereas his predecessors received a polite hearing and little more, Sinha will be talking to the partially converted.

It has taken a global financial crisis of as yet uncertain dimensions to disturb the dove-cotes of the industrialised countries who dominate the IMF and make its rules. Leaders from the G-7 group of countries are now talking about redesigning the global financial system and the IMF8217;s role. The IMF itself is on the defensive. Having failed to predict the outbreak of present financial crisis or find remedies, it is having to go back on diagnoses made as recently as a year ago. This humbling of the mighty ought at least to make the IMF and the capitals of industrialised countries somewhat more receptive to the complaints and demands of developing countries who still see no way out of their troubles.

Two sets ofshort-term answers are being sought at the IMF meetings to deal with the immediate crises in the global economy. One, effective bailout packages for stricken and vulnerable economies and two, appropriate action from the US and European Union whose economies have so far been insulated from the contagion. As regards the latter, Sinha says rightly that it is imperative that macroeconomic policies of major world economies are designed to protect world output and trade growth. Specifically, industrialised countries must be urged to lower interest rates and to boost global demand by higher government spending, if necessary. The second set of solutions involves the size and form of IMF intervention in crisis-ridden economies.

There is general consensus that the Fund steps in with too little too late tied to conditionalities which worsen the patient8217;s condition. A whole series of measures will have to be undertaken in short order. The IMF8217;s resources need to be increased substantially. Right-wingers in the USCongress who mainly control the purse-strings should realise, if they have not already, that the US economy is not entirely immune to the contagion. So treating the disease elsewhere actually means doing the US a good turn.

Quick intervention can do more to calm panic in financial markets and restore confidence than sophisticated IMF recovery packages. Therefore, regional stabilisation funds should get many votes this year. One measure that is winning support is allowing private lenders banks and bondholders, for example to carry some of the losses instead of being bailed out by the IMF as has been the practice in the past. An emergency standstill mechanism which would suspend repayments during a crisis is proposed. Another is for the IMF to continue lending to countries which may be in default to private banks and other private entities. Naturally, the powerful club of international investment banks does not like the sound of this but everyone is having to learn that risks carry losses as well asrewards. Finally, it seems inevitable that the IMF will have to put its imprimatur on some sort of capital controls for short-term investments.