LONDON: New management usually signals a new beginning. For the International Monetary Fund, however, the opposite is needed. Michel Camdessus’ successor as IMF managing director should be charged not with renewing and reinvigorating the fund, but with either drastically curtailing its functions or closing it down.
Founded in 1944 and financed by its member governments, the IMF was designed as a type of insurance arrangement to support a system of fixed exchange rates based on the American dollar and, ultimately, on gold. The competitive devaluations that plagued the interwar years were to be made a thing of the past. Countries suffering temporary setbacks and in need of dollars to buy imports could turn to the IMF for “balance of payment support,” thus saving them from devaluation. Once an economy turned around, the IMF loan would be repaid.
Back then there was a dearth of private lenders. International capital markets were small and constrained by exchange controls, a minefield of regulations, and the lack of convertibility of even the major currencies. Most capital flows were official - government to government. In such a world, the IMF’s founders rightly discerned that IMF-type aid was essential.
Today, with no fixed exchange rates to defend, the raison d’Рtre for the IMF has vanished. The world has witnessed an explosive expansion of private international capital markets. So the IMF should have disappeared years ago, but it is in the nature of international institutions that they live on long after they have lost their usefulness. Lose one role, they create another.
The IMF has transformed itself into a purveyor of aid in the form of dollar loans to the rulers of the Third and postcommunist worlds. Heavily subsidized, the loans are attractive to borrowing governments, especially those whose credit ratings have plummeted. No surprise, then, that countries are ambivalent about preparing themselves to insure against financial shocks. Relax, the fund will bail us out: seems to be the motto.
The IMF argues that it must lend with a subsidy, otherwise countries would never accept the fund’s severe “conditionality.” The IMF often ruthlessly requires a reform program which, inter alia, increases tax revenues, restricts the printing of money, and frees up international trade and payments. Although the fund has committed grave errors (Thailand and Russia of late), a majority of economists reckon that they are hawking the right medicine. But there is many a slip between Washington’s mouth and Moscow’s lip.
Although sometimes bridling at liberalization measures, on the whole, borrowing governments welcome reforms that increase their revenues, as these improve the prospects of staying in power. The rise in taxation can be blamed on the IMF, with the increased revenues siphoned off for political purposes.
What is to be done? Can the IMF be abolished, or its functions turned over to a privatized World Bank? Both are probably beyond the realm of possibility. So the question really is, not one of abolition, but of reform — of renegotiating the Bretton Woods agreements of 1944 (as amended) that gave birth to the IMF, and of setting specific and limited functions for it in new articles.
One basic reform should be to transform the IMF into a super rating agency, like Standard & Poors or Moody’s. The IMF would then have primary responsibility for assessing the credit worthiness of all 160 member governments and perhaps government agencies. The IMF, of course, would do more than S&P because it would be responsible for giving advice when requested by governments. The loan operations of the IMF would be wound up over a suitable period.
It is now widely appreciated that the real role of the IMF today is to give its views on macroeconomic policy which can inform the very large flows of private capital that are moving about the globe. I agree. But then what is the role of subsidized lending? Rating agencies do a splendid job without compromising themselves by lending - and of course they do themselves lead the markets. Why not the IMF? Elimination of the IMF’s lending functions would solve the problem of perpetual turf wars between it and the World Bank. The confusion that this has caused among borrowers and lenders would disappear. The IMF could continue with its other roles, such as providing and official center and forum for discussing international economic problems, and perhaps even for the resolution of disputes.
Such reforms, though feasible, I confess are unlikely. Despite the Asian and Russian fiascoes, the general view among the international financial clerisy is that the IMF needs more, not fewer functions. It is said that with the globalization of finance the world needs a central bank and that the IMF is the natural basis on which to build such a capacity. The IMF would be freed from its political straitjacket, and like the new European Central Bank, should be independent of national governments. The IMF, it is argued, should have the power to create money and to carry out its lender-of-last- resort function to countries, rather than banks, on a global scale. After all, it is said that the advent of globalization has rendered distinct national moneys dependent, if not powerless. The call is for a new financial architecture that reflects these realities.
One may readily dismiss such suggestions as mere pipe dreams of the one-worlders which will be resolutely opposed by the giants of America’s Federal Reserve Board and Congress. I suspect that this is true today, but I also know that only two decades or less ago many of us thought that there would never be a euro. Perhaps we should be less sanguine this time.
Sir Alan Walters, a former chief economist at both the IMF and World Bank, was personal economic advisor to former British Prime Minister Margaret Thatcher. He is vice-chairman and director, AIG Trading Group. His most recent book is The Economics and Politics of Money.
