SURPLUS MANAGER
In the years after the collapse of Bretton Woods, the IMF reinvented itself as a principle vehicle for managing the surpluses that followed the oil price shocks of the 1970s. It borrowed from the new surplus countries, which thus partly managed their new assets through the intermediation of the IMF. As a result, the IMF could lend to those countries that suffered shocks from the increase in petroleum prices.
Indeed, a large financial actor can play a stabilizing role. In the past, the counter-cyclical behavior of large private institutions stabilized market expectations during panics. The house of Rothschild made the first half of the 19th century stable. In the great panics of 1895-1896 and 1907, J.P. Morgan calmed the US economy. At the time of the Great Depression in the 1930s, there was no equivalent power. Last year, there were some signs that Goldman Sachs felt obliged to lean against the wind in order to stabilize markets.
The IMF could be a powerful financial stabilizer if it managed a significant part of the new surplus countries' reserve assets, for it would be well placed to take bets against speculators. This would ultimately benefit the reserve assets' owners who, by virtue of accumulating large surpluses, have a similar interest in world economic and financial stability. At the same time, the management of reserve assets by an internationally controlled asset manager would remove suspicions and doubts about the use of assets for strategic political purposes.
But to carry out this completely new task, the IMF would need to regain the trust of its members. The rise in reserves in many Asian countries was a deliberate response to the 1997 financial crisis, which fueled disillusion with the IMF. So, before it could assume the role of global reserve manager, new surplus countries would need substantially more influence over IMF governance. Only then could they be confident that they would not be subject to politically motivated manipulation.
Harold James is professor of history and international affairs at Princeton University and author of The Roman Predicament. COPYRIGHT: PROJECT SYNDICATE
RSS