Opinion The Funds new clothes
DSKs gone,but we still need a reformer to head the IMF.
The alleged maid in Manhattan incident will haunt Dominique Strauss-Kahn. After calls from international leaders to step down as a result of the incident,including from US Treasury Secretary Timothy Geithner,DSKs resignation on Thursday came as little surprise.
The Funds status changed in DSKs tenure,its hand forced by the global financial crisis. Lending grew seven-fold,more open-minded research was done,and the IMF became a key international actor due to the crisis and consequences such as the sovereign-debt nightmare in Europe. Despite the measures DSK took to stop the fund from becoming obsolete,it is clear that credibility-inducing reform is needed.
The IMF states its objectives are working to foster global monetary cooperation,secure financial stability,facilitate international trade,promote high employment and sustainable economic growth,and reduce poverty around the world. But its main problem in doing this is a credibility crisis,particularly in the eyes of emerging market economies or EMEs. This stems from EMEs being under-represented in the IMFs voting structure,as well as a perception that the IMF has different conditionality standards for different parts of the world: compare favourable lending to Eurozone Europe with conditions on Latvia that caused a 25 per cent fall in output,or with the more strident terms given in the 1997 East Asian crisis. Until this is overcome,the IMF is likely to stay beleaguered,unable to foster the real international economic governance and cooperation needed in a globalised age.
The problem in not being able to foster this necessary governance cooperation is that in the aftermath of crises,when the spirit of forced cooperation declines,trade,far from being seen as mutually beneficial,becomes a zero-sum game. Nations push domestic agendas to the detriment of international sense,as seen in currency wars in which they competitively devalue to boost growth,causing massive capital-flow volatility.
As the dollar continues its decline and China hangs on steadfastly to a mercantilist currency policy,currency wars will only get worse,ceteris paribus. Until the IMF fosters a real cooperative attitude by getting EMEs who represent the future fully involved,real economic stability remains a dream.
Although replacing DSK with a non-European head would be a useful first method in regaining credibility,unfortunately for EMEs this is unlikely. Although financial weight is adjusting east,accentuated by the global financial crisis,the job will probably remain in Europe. Its probably for the best that Montek said hes happy where he is.
There are other ways though,of regaining credibility,and recent reforms show the IMF is capable of change,even if the pace thus far has not exactly been jet-speed. Voting share reform occurred: 6 per cent of shares will be shifted from over-represented countries to under-represented ones. While China will become the third biggest individual shareholder,India,Brazil and Russia all enter the top ten.
The research department,formerly a bastion of laissez-faire,showed the biggest progress though: papers are now produced agreeing with the use of capital controls in some developing countries in certain situations,while previously sacrosanct inflation targets in central banks are questioned for being too low,and thus risking post-crisis recovery.
Good steps,but only a start. First things first: DSKs successor. The important thing in this is not necessarily that he or she be from an EME,but that he or she be a reformer. Having a reformer as managing director would help to allay EMEs fears,and build credibility that the IMF would no longer act like an old boys club in spirit,even if it would still technically be one.
Additionally,to help push through key decisions,the current US veto on supermajorities (majorities where 85 per cent of votes are needed to pass something) should be gotten rid of,while further adjustment to make the executive board representative is needed,given the boards level of influence. Additionally,in building the IMF as a credible tool that EMEs can use,on their part,EMEs need to hedge differences. Currently very heterogeneous,any lone action taken by an EME is easily offset by concerted advanced country proposals,given the votes between developed nations and EMEs are split 60:40.
Building credible international institutions of any kind is always difficult; but in an international economy,a strong institution in which sovereign nations have faith is important. Clearly the disillusionment with the IMF that currently exists is a worry. It is essential that DSKs successor is capable of taking up the mammoth challenge ahead.
The writer is based in Delhi
express@expressindia.com
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