Reforming the IMF Too little, too late

From an awe-inspiring organisation that could shape the
economic policies of nations, the International Monetary Fund has now become all teeth and no bite. There’s no reason to fear its US-dominated armtwisting.

Paranjoy Guha Thakurta

Here's some good news for developing countries. The International Monetary Fund (IMF) is slowly but surely becoming irrelevant. It was not very long ago that the Washington DC-headquartered organisation, which was established in 1945 after the end of the World War II in the wake of the historic Breton Woods conference, was perceived by many—including quite a few in India—as a body that inspired awe, if not fear, and, often, derision. Today, thankfully, the IMF is a pale shadow of what it used to be.

Yes, the Fund still prepares excellent “state of the world economy” reports every six months. But it no longer calls the shots in the corridors of power. No longer do heads of state, not to mention finance ministers, tremble at the sound of the phrase “IMF conditionalities”.

How did this situation come to pass to an international organisation that was meant to foster global economic stability and help countries facing financial crises? The fault lies entirely at the doorstep of the Fund.

As economists like Nobel Laureate Joseph E Stiglitz, who was was chief economist at the World Bank from 1996 until 1999, and others have pointed out, the IMF has been guilty of prescribing “one-size-fits-all” kind of policies that ignore the complexities of specific countries and their peculiarities. By pushing conservative policies that included privatisation of social welfare schemes and by displaying blind faith in the efficacy of markets to sort out all economic problems, the IMF worsened the economic conditions prevailing in some developing countries in Asia and Latin America.

The Fund is now singing a different tune. It is claiming that it is reforming itself to meet, among other objectives, the aspirations of Third World countries. For instance, after the Asian financial crisis of the late-1990s, the Fund has changed its position and conceded that allowing unfettered flows of speculative capital in a country's stock markets can be an extremely risky proposition.

Consider the IMF's “quota and vote” system that is linked to the financial commitments made by its 184 member countries. A member's quota delineates basic aspects of its financial and organisational relationship with the Fund, including its powers to vote and its access to loans. In the IMF, seven countries dominate the decision-making process—the US, Japan, Germany, the UK, France, Canada, and Italy. A major decision by the IMF requires 85 per cent voting support. This implies that one country, the US, has veto power, with its 17 per cent voting power. The total vote share of the 80 poorest members of the IMF is barely 10 per cent, while four rich countries—the UK, Germany, France and Japan— control 22 per cent of the total vote and have permanent seats on the Fund's governing board.

The Indian government's position is that the present quota system of the IMF is “hopelessly flawed and outdated”. On September 18, much to India's disappointment, the implementation of a comprehensive reforms package for the IMF was postponed after a meeting of the Fund's main policy-making body that was held at Singapore. At the meeting, the 24-member international monetary and financial committee of the IMF decided to embark on a “second stage” of reforms for the Fund while simultaneously enhancing the quotas of four selected countries, China, South Korea, Mexico and Turkey—a move that critics of the Fund perceived as akin to the old Imperial policy of divide-and-rule.

When this decision became known, the finance ministers of India, Brazil, Argentina and Egypt issued a statement on behalf of themselves as well as representatives of several other important developing countries representing a substantial share of the world's economy and population. The statement read: “We reiterate that we support the increase in quota for the four countries (China, South Korea, Mexico and Turkey) who are the present beneficiaries of the ad hoc increase. However, the present quota calculation formula is opaque and flawed. We believe that fundamental reforms are possible only if the contours of a final outcome are defined a priori followed by genuine consultations amongst nations as equal partners. The picture that emerges at present points to a second stage that is by no means guaranteed to happen or, even if it happens, may not advance the Fund's legitimacy.”

The statement was of the view that a “disturbing picture that emerges is that some developing countries will be given increases by reducing the shares of some other equally deserving countries”. The finance ministers of India, Brazil, Argentina and Egypt were categorical that this position was “unacceptable” and “further erodes the credibility and legitimacy of the IMF”. It should be noted that it was after a two-year discussion that the quotas of China, South Korea, Mexico and Turkey were increased—and that, too, by only 1.8 per cent.

The Indian government need not fret too much. The IMF itself is not exactly in the pink of health. Three years ago, the Fund had loaned more than US$ 100 billion to different countries. This figure has shrunk to less than US$ 20 billion a year. As a matter of fact, instead of primarily being a lender of funds, the IMF has become a net receiver of funds with an inflow in excess of US$ 20 billion in the form of repayments of past loans, much of it from developing countries.

The Fund appears to be in a mood to introspect, criticise its past record, become more transparent and reform itself to remain irrelevant. But many of these so-called reforms in the IMF may be a case of “too little too late”.