The Uncertain Future of the IMF
Kenneth Rogoff has an interesting article on the problems facing the International Monetary Fund.
Sept. 25, 2006 issue – As the international Monetary Fund holds its big fall meetings in Singapore this week, it faces a financial world that has been turned on its head. Traditionally, the Fund has helped out bankrupt emerging-market governments using loan money collected mainly from Western nations. But now, the Fund is being asked, in effect, to play a much broader role in helping maintain financial stability in a world where the lenders and creditors are trading places. With the United States borrowing two thirds of global net savings and Euro-zone countries like Italy, Greece and Portugal struggling to control their government finances—while emerging markets sit on mounting foreign-exchange reserves—many worry that ground zero for the next big global financial crisis could be somewhere in the wealthy West. Given that Asia now accounts for almost 40 percent of global income, and an even larger share of its surpluses, it makes no sense that IMF voting rights and leadership posts are still dominated by the United States and Europe.
At immediate issue in Singapore is a relatively modest proposal by the Fund’s managing director, Spaniard Rodrigo Rato, that would give slightly more voting power to China, South Korea, Turkey and Mexico. But this proposal is just a stalking horse for a larger reshuffling that would acknowledge the seismic shifts in global income that have taken place since the International Monetary Fund was founded after World War II. For an institution that pretends to reflect countries’ relative economic influence, it is simply untenable to have China, with 15 percent of global income, own only 2.9 percent of the Fund’s voting shares.
Perhaps the biggest obstacle to reform are those who simply do not see the importance or urgency of revamping the IMF. Four years of rapid global growth have lulled many into thinking that the Fund is an anachronism, that nothing will ever go wrong. Sovereign debt markets, in particular, seem to have forgotten the spate of spectacular global debt crises that raced across the developing world only a short while ago. These include Mexico in 1994, South Korea, Indonesia and Thailand in 1997, Russia in 1998, and Brazil, Argentina and Turkey in the early 2000s. Each time, global financial stability stood on the brink, and each time the Fund helped orchestrate a global response, often pouring in billions of dollars in bridge loans out of its own resources.
I don’t follow international finance all that much, but the article does point out that things have changed tremendously, and the IMF has not kept up with the times. My general animosity for governments and their international extensions tends to make me skeptical of claims about managing/mitigating global financial crises. This point by George P. Shultz, William E. Simon, and Walter B. Wriston seems like a valid one to me,
The promise of an IMF bailout insulates financiers and politicians from the consequences of bad economic and financial practices and encourages investments that would not otherwise have been made.
But as I’ve already noted, this area is one I know very little about.
Via N. Gregory Mankiw.