IMF, the guardian hero

Today's NYT carries a story by Steven Weisman on the IMF and its search for a new mission for itself. There is nothing new in it, but the opening paragraph is certainly eye-caching:

A decade ago, the International Monetary Fund helped to stabilize the world economy after markets collapsed in Latin America, Russia and Asia. Though critics often have rued its interventionism, the fund was widely hailed as a heroic guardian of the global financial system.

Well, I was around a decade ago, and I do not recall anyone (possibly other than someone on 19th Street) hailing the IMF as a heroic guardian of anything in the wake of the Asian financial crisis. Instead the debate was about whether the IMF got it just a little bit wrong (the IMF's own post-mortem evaluation) or a whole lot wrong. I don't imagine that Joe Stiglitz and Marty Feldstein see eye to eye on many things, but both thought (along with many others) that the IMF's policies in East Asia had been grossly inappropriate. 

But there is a serious question now of what the IMF's future role ought to be. What do you think? 

Comments

[Witte Haai]

Can the world really do without some sort of international auditor like the IMF? I hardly think so. Some has to do it, and the IMF seems to be a natural candidate.

I do think they should change their internal balance of power, though, and allow developing countries to play a larger role.

[Chandan]

Why can't the IMF abandon give-and-take (conditionalities) when it makes out loans to cash-strapped countries? The harsh liberalization conditions not only serve its funders but also exacerbate monetary stability, the main goal of IMF. Forcing governments to liberalize large, inefficient public banks in a way that serves the donors (the management contract goes to foreign companies) will not serve the ailing economies.

I think the IMF should focus strictly on advising (but not forcing) governments on the evolving monetary situations. It should just constrict on this one rather than frantically scrambling around to find a cause to make sure that it is still relevant in the present context (remember the way it inserted poverty reduction in its objectives!)...Many of its predictions have proved to be wrong and damaging.

It should focus on monetary policy recommenation (no pressure on governments to implement its plans, no bullying, no machinations to influence FDI if its recommendations are unheeded, no puppetism of its main funders, etc.)

[hari]

Dani-

I'm of the view that the Bretton Woods Institutions have outlived their original mandate: either they're completely REFORMED or made redundant.

If you know how OECD countries control the voting machinery within the executive, there's no way change is likely to come.

Globalization, on the other hand, has made IMF irrelevant as manufacturing unit labor cost has dramatically changed international division of labor and trade flows.

China and India have more or less become manufacturing centres of global trade output/supply.

Finally, IMF is more of an institutional hazard to development than its facilitator.

[Joe]

The audacity of the NYT writer should be commended! As to the future of IMF, I think it should be run more like a commercial bank. The fact is that it has never been a philanthropic entity. By professing to be "profit biased" IMF could do a far better job serving the world than under the current, "politically-biased" system.

[Per Kurowski]

Well those thinking that IMF has lost its role will probably not have to wait for long before proven wrong because it is just that the regulatory machine invented in Basel and promoted by the IMF has been very good at eliminating all those small tremors that helps us to avoid the big quake. Now as the rumbling has recommenced the first task at hand must be to save this mutual admiration club of central bankers from themselves.

For instance if you go to their web site and read their Global Financial Stability Report, September 2007, what stands out the most is their absolute reluctance to accept that through their regulations, they might indeed have been the largest de-facto suppliers of financial systemic risks. The minimum capital requirements imposed by them on banks around the world and their empowerment of the credit rating agencies as the marines in charge of driving out all risks from banking, no matter what, is the true genesis of the problems we now face.

Am I upset? You bet! When reading IMF admonishing the investors with that they “have an obligation and responsibility to understand the dynamics and liquidity risks associated with the products they buy… and they should not assume that the simple letter provided by the rating agencies show equivalent risks as those for hither asset classes” and blithely ignoring that they themselves use those same simple letters interpreted in very simple ways when imposing rules on the banks is sort of shameful to say the least.

All of us have of course fully supported the independency of the central banks but if they do not have it in them the character to generate sufficient internal criticism and make the debates public then, unfortunately, because of the many dangers from incest, we perhaps need to revisit this whole independency issue.

[Mika]

The IMF and the World Bank should be streamlined into one agency (and many of the “redundancies” reduced) with three of the following functions:

The new entity's 1) main purpose would be as a global repository of information, which both agencies already function as now. In a greatly enhanced manner it would gather statistics, develop reports, provide a forum for discussion, and point out future areas of research in order to document what works and what doesn't, in which situations, and whether certain successes can be transplanted or adopted to other countries/cultures. Ivory tower academia would be supplemented with on-the-ground data gathered by people who permanently live in the countries in question.

Next, it would 2) act as an advisor bank when countries ask for assistance, keeping a list of voluntary experts that would be “on call,” in a way.

Finally, 3) it should retain its lender capabilities to a diminished extent, but instead of loaning to governments in general it would focus more on giving to specific society-building projects (foremost, infrastructure, education, and communications, extending to health care in certain regions). Whether lending to government or other groups (NGOs, for example), money for such projects would be lent in stages contingent upon predetermined progress.

Two major challenges exist to #3:
1)The West’s and US’ persistent use of loans as a foreign policy tool. Obviously, a better system would have to be developed that addresses those who give the most money and those on whom it has the most impact. However, I agree with Chandan, that considering the current decisionmaking structure of the IMF, such change is unlikely to come from within.
2) What to do when the project doesn’t fulfill a certain stage of predetermined progress? Do you cut off all aid, reduce it, allow for temporary boosts? What if they can never get those projects off the ground without a minimum amount? I realize these points and am still pondering them, but at least it would remove some of the incentive for to reduce corruption and increase accountability.

[Air Jordan Dub Zeros]

Two major challenges exist to #3:
1)The West’s and US’ persistent use of loans as a foreign policy tool. Obviously, a better system would have to be developed that addresses those who give the most money and those on whom it has the most impact. However, I agree with Chandan, that considering the current decisionmaking structure of the IMF, such change is unlikely to come from within.

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