The future of the Fund

The future of the Fund

In some circles, it’s said that International Monetary Fund (IMF) is the only clear winner of the global financial crisis. But clear winners need to be clear about what they do. More importantly, they need to be clear they are seen as legitimate, especially by emerging nations such as India. On both counts, the meeting of Group of Twenty (G-20) finance chiefs last weekend has helped provide some clarity.

First, consider the question of mandate. This Bretton Woods-era institution—out of a job ever since the post-War currency agreement broke down in 1971—has been grappling for relevance. By the 1990s, IMF had reinvented itself as the henchman for the Washington Consensus: Still, imposing fiscal austerity and capital account liberalization only earned it disrepute in the emerging world. That reputation reversed when it turned a new ideological leaf this crisis—it doesn’t mind fiscal deficits and capital controls— though it’s surely aware that “ideological flexibility" doesn’t exactly qualify as a job.

What could qualify as one (but not the only one) is watching over global imbalances. With the new cold war between surplus and deficit nations dominating the post-crisis landscape (impending polls have turned the US particularly bitter towards China), and with every nation looking out for itself (witness the competitive currency devaluation), it’s left to a multilateral organization of IMF’s stature to do something. Even the G-20, feted last year as the new global coordinating body, has seen cracks develop in the last few months—primarily over imbalances. That’s why the G-20 statement this weekend, to give IMF some power to assess economic imbalances, is key.

But that kind of power has to be followed with legitimacy. Sovereign nations won’t allow an external organization to dictate their trade surplus if they think they aren’t represented.

Hence, second, the salience of IMF internal reform. The G-20 has noted that the emerging world will possess more say: 6% of voting rights will be awarded to developing economies; Europe will give up two seats on the 24-seat executive board.

How IMF will accommodate these voice-vote reforms could determine where it will go. That sense of direction takes time. But here’s a suggestion: If IMF really wants to make its direction clear, and quickly, it should stop appointing a European as its head. Are there no competent Chinese or Indians around?

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