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The G-20 and IMF reform
April 01, 2009
But there are few takers for IMF money because there is a basic problem: many countries don't see the International Monetary Fund as very "international." Emerging market countries in Latin America, and in particular Asia, see it as an Atlantic-centred, especially Europe-dominated, institution; that is, they see it as a Euro-Atlantic Monetary Fund.
Are the critics' views justified? Consider the recent Latvia programme. Latvia had a current account deficit of 24 per cent of GDP, and yet was not required to depreciate its currency.
Justified or not, the perception of a double standard has already had consequences. In the current crisis, several emerging market countries (Brazil, Mexico, Korea and Singapore) did need emergency liquidity but they chose to go to the US Federal Reserve rather than the Fund.
All this is a pity because the crisis has created a real opportunity for restoring the Fund's role. In origin, impact and aftermath, this crisis has been global, emphatically underlining the need for strengthened cooperation.
The crisis has created an opportunity in a subtler way. The Fund was always plagued by an asymmetry between creditors, who had greater say and power; and debtors who did not. And the identities (and biases) of creditors and debtors remained fixed, creating entrenched and often irreconcilable positions.
This global crisis has shaken up those identities. Some debtors of the past are now sitting on large piles of foreign reserves. More importantly, creditors have turned debtors.
If that is so, they are less likely to devise rules that reflect the power of creditors and more likely to devise rules that are fair to debtors. The philosopher John Rawls showed famously that a society in which individuals are behind a "veil of ignorance" about their true identities, is more likely to establish just rules. This crisis has usefully created such a veil of ignorance.
Converting crisis into opportunity requires taking some essential steps. Above all, the industrial countries, especially Europe, must agree to comprehensively re-write the governance structure of the IMF. Consider just one anomaly: If the recent troubles in Belgium had led to the creation of Wallonia and Flanders, each of these regions, roughly the size of a suburb or slum in Mumbai or S�o Paulo, would have had quota shares not very different from those of India and Brazil.
The voluntary ceding of power is, of course, rare in history. But developing countries have an opportunity to rectify the imbalance in governance because Europe needs the IMF's resources to bail out the flailing economies on its eastern frontiers; that is, Europe needs a Brussels backyard clean-up fund.
How should they play their cards? They should reject the current proposal to increase resources unless it is accompanied by an overhaul of (not tinkering with) IMF governance, and on doing it now rather than postponing it when pressures for change could dissipate.
If the strategy of developing countries is ineffective in making Europe shed this last vestige of empire that dominance in the IMF represents, then they must vote with their feet. The sad truth is probably that only the credible threat of an alternative such as an Asian Monetary Fund will force the current Euro-Atlantic Monetary Fund to become a truly International Monetary Fund.
The authors are, respectively, Sobti Professor and Director, Center for the Advanced Study of India, University of Pennsylvania, and Senior Fellow, Peterson Institute for International Economics and Center for Global Development, Washington DC.
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