The IMF has been one of the few beneficiaries of the global economic crisis. Just two years ago it was being downsized and serious people were asking whether it should be closed down. Since then, there has been a renewed demand for IMF lending. Members have agreed to a tripling of its resources. It has been authorized to raise additional funds by selling its own bonds. The Fund is a beehive of activity.
But the crisis will not last forever. Meanwhile, the IMF’s critics have not gone away; they have merely fallen silent temporarily. The Fund only encourages their criticism by failing to define its role. It needs to do so while it still has the world’s sympathetic ear.
The IMF’s first role is to assist countries that, as a result of domestic policies, experience balance-of-payments crises. Their governments have no choice but to borrow from the Fund. To safeguard its resources — that is, to be sure that its shareholders are paid back — the Fund must demand difficult policy adjustments on the part of these borrowers.
The problem is that the IMF has bought into the rhetoric of its critics by agreeing to “streamline” its conditionality. In fact, where structural weaknesses are the source of problems, the Fund should still require structural adjustment as the price of its assistance. By seeming to give ground on this point in the effort to win friends and influence people, the IMF has created unnecessary confusion.
A second role for the IMF is to act as a global reserve pool. Countries have accumulated large reserves in order to insure against shocks. This is costly for poor economies, which could better use the resources for investment and consumption. Unfortunately, the recent demonstration of the volatility of global financial markets only encourages the tendency to stockpile reserves.
It would be more efficient to pool the reserves of countries that need them at different times. The IMF has moved in this direction by creating a Short-Term Liquidity Facility (STLF) through which countries with strong policies can draw from the Fund up to five times their quota without conditionality. But the STLF still requires a burdensome application process, which only Mexico, Colombia and Poland have been willing to endure.
This made sense so long as the IMF’s resources were limited because the application process allowed the Fund to limit its liability. But with the tripling of resources, this rationale no longer exists. The IMF should categorically announce which countries qualify for the facility, automatically making them members of the pool.
A third role for the IMF is macro-prudential supervisor. Recent events have made clear that someone needs to anticipate and warn of risks to global financial stability. The G20 suggests that the Financial Stability Board (FSB), made up of national supervisory authorities, should take the lead in these tasks. The Fund, through its early-warning exercises and joint IMF-World Bank Financial Sector Assessments, is to play only a supporting role.
But why the FSB should head up this process is far from clear. The IMF, with its universal membership, is more representative — and it has a larger expert staff.
National supervisors may be reluctant to surrender this responsibility to a multilateral organization. If so, this is shortsighted. Financial markets and institutions with global reach need a global macro-prudential regulator, not just a loosely organized college of supervisors. Or it could be that national policymakers don’t trust the IMF, given that it essentially missed the global financial crisis. If so, the Fund needs to win back their confidence.
This brings us to the IMF’s fourth role, namely using its bully pulpit to warn of risks created by large-country policies. Small countries are subject to market discipline, as any Latvian will tell you. But when large economies whose currencies are used internationally need more resources, they can just print more money. Not only do they feel less market discipline, they are subject to less IMF discipline, since they are not compelled to borrow from the Fund.
However, as the subprime mortgage debacle reminds us, large countries’ policies can place the global financial system at risk. The Fund, wary of biting the hand that feeds it, has been reluctant to issue strong warnings in such instances. But if the IMF is to have a future, its management will have to issue stronger warnings about the next dangerously large US current-account deficit, the next unsustainable housing boom, or whatever large-country problem succeeds them. There can be no more mincing of words.
Finally, the IMF needs to coordinate reform of the international system. If, in the long run, a supra-national unit, the Special Drawing Right, is to replace national currencies in international use, then the Fund will need to guide its development. If stop-gap measures are required during the transition, the Fund must provide leadership there as well.
So far, however, the innovative ideas for reforming the international system have come from the UN, the UK and the People’s Bank of China. The Fund has been notable mainly for its silence.
The crisis is not yet forgotten, but the window is closing. The next meeting of the IMF’s Board of Governors will be in early October in Istanbul. If the Fund does not provide a clear vision of its future by then, the opportunity will have been missed.
Barry Eichengreen is professor of economics at the University of California, Berkeley.
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