Meral Karasulu did what any seasoned International Monetary Fund (IMF) staffer would do: She grinned and, for the umpteenth time, listened to suggestions that the institution was to blame for the 1997 Asian financial crisis.
“Thank you for your question,” she replied to an audience member at a 14 May EuroMoney conference in Seoul. Then, she launched into a defence of IMF’s actions.
As IMF’s representative in South Korea, Karasulu is used to the drill. After all, many Koreans routinely refer to the “IMF crisis”. It’s a reminder that a decade after Asia’s turmoil, IMF is still explaining itself wherever it goes.
Three weeks after the Seoul conference, there was similar griping at an event I attended in Buenos Aires.
The mood had barely changed since March 2005, when President Nestor Kirchner scored points with many of Argentina’s 40 million people by calling IMF “pathetic”. He has been demanding that the institution stop criticizing the Latin American country.
Korea and Argentina have little in common. Yet Korea is among the nations stockpiling currency reserves to avoid having to go to IMF for a bailout ever again. Argentina, meanwhile, continues to tout the end of its IMF-backed programme last year as an economic victory.
This column isn’t a defence of IMF’s actions during the Asian crisis or Argentina’s in the early 2000s. The Washington-based fund has a small army of well-compensated people to do that. And IMF has had its fair share of blunders, including telling Asian countries to tighten fiscal policy during a crisis.
Yet, all this talk of IMF irrelevance is overdone. What’s more, the chatter suggests the creation of a new bubble called complacency.
“It’s ironic to my mind that people say the fund isn’t needed anymore because nothing in the global financial system is broken at the moment,” John Lipsky, IMF’s first deputy managing director, said in an interview last month in Tokyo. “It strikes me we are trying to anticipate and prepare for when things may go wrong again.”
Lipsky made this remark on 24 May, well before China’s key stock index plunged 7.7% on 4 June. Yet, it gets at an important point that transcends spin: IMF is merely waiting for the next time the global financial system goes awry.
Sure, Asia has insulated itself from markets with trillions of dollars of currency reserves. IMF’s phones may be ringing off the hook if China’s economy hits a wall, the US dollar plunges, the so-called yen-carry trade blows up, a major terrorist attack occurs, oil prices approach $100 (Rs4,100) a barrel or some unexpected event roils world markets.
The thing is, IMF and its Bretton Woods sister institution, the World Bank, have scarcely been more necessary. How efficient and cost-effective they are is debatable; what’s not is that today’s global economy needs the buffering role that both of them play.
Investors and executives everywhere are depending on Asia’s growth and potential to boost profit. It’s often forgotten that more than two-thirds of the world’s poor live in Asia. The region needs more help from the World Bank, not less. Capital flows to Asia are increasing IMF’s importance.
IMF was never set up to play the role it did during crises in Mexico, Asia and Russia in the 1990s and turmoil in Latin America since then. Even so, it will be called upon the instant a crisis in one country spreads to another. As imperfect as IMF is, the world needs the economic equivalent of a fire brigade when markets plunge.
There’s much chatter about how global prosperity is reducing the need for billion-dollar IMF bailouts. As of March, IMF lending had shrivelled to $11.8 billion from a peak of $81 billion in 2004. A single nation, Turkey, accounted for about 75% of IMF’s portfolio.
Isn’t that a good thing? IMF is like a paramedic: You hope you won’t need one, but it’s great that one is just a phone call away. Plenty of things could still go awry and necessitate a call to IMF.
The global economy is rather Dickensian at the moment; depending on whom you ask, either the best of times or the worst of times may be on the way. The best-of-times crowd can point to strong global growth, stable inflation, ample liquidity, tight credit spreads and the profits many hedge funds and private equity firms are making.
Or are these potentially the worst of times? Some see bubbles everywhere they look—in every region, in every asset class. Too much liquidity chasing too few safe investments is rarely a comforting state of affairs. It has led to an unprecedented amount of leverag e the world over. The upshot is that volatility in one market may suddenly hurt others.
Complacency looms large in today’s world. Too many investors think the good times are here to stay and too many governments are ignoring their imbalances. For all the bellyaching about global imbalances—including US deficits, an undervalued Chinese currency, ultra-low Japanese interest rates—no one is doing anything to fix them.
All this means that, far from being irrelevant, IMF may be in for a very busy couple of years.