What a difference the crisis has made for the IMF. It was just a few months ago that this important but unloved institution, a landmark of post-war global economic arrangements, seemed destined to irrelevance.
The IMF has long been a whipping boy for both left and right — the former because of the fund’s emphasis on fiscal rectitude and economic orthodoxy, and the latter because of its role in bailing out indebted nations. Developing nations grudgingly took its advice, while advanced nations, not needing the money, ignored it. In a world where private capital flows dwarf the resources at its disposal, the IMF had come to seem an anachronism.
And, when some of the IMF’s largest debtors (Brazil and Argentina) began to prepay their debts a few years ago with no new borrowers in sight, it looked like the final nail in the coffin had been struck. The IMF seemed condemned to run out of income, in addition to losing its raison d’etre. It shrank its budgets and began to downsize, and, while it was handed some new responsibilities in the meantime — surveillance over “currency manipulation,” in particular — its deliberations proved largely irrelevant.
But the crisis has invigorated the IMF. Under its capable managing director, Dominique Strauss-Kahn, the fund has been one of the few official agencies ahead of the curve. It moved quickly to establish a fast-disbursing emergency line of credit for countries with “reasonable” policies.
It ardently championed global fiscal stimulus on the order of 2 percent of world GNP — a position that is all the more remarkable in view of its traditional conservatism on all fiscal matters. And, in the run-up to the G20 summit in London, it thoroughly overhauled its lending policies, de-emphasizing traditional conditionality and making it easier for countries to qualify for loans.
Even more significantly, the IMF has emerged from the London meeting with substantially greater resources, as well as new responsibilities. The G20 promised to triple the fund’s lending capacity (from US$250 billion to US$750 billion), issue US$250 billion of new Special Drawing Rights (a reserve asset made up of a basket of major currencies), and permit the fund to borrow in capital markets (which it has never done) if necessary.
The IMF was also designated as one of two lead agencies — along with an expanded Financial Stability Forum (now renamed the Financial Stability Board) — charged with providing early warning of macroeconomic and financial risks and issuing the requisite policy recommendations.
Another piece of good news is that Europe has given up its claim on naming the IMF’s managing director (as has the US on its corresponding claim on the World Bank presidency). These senior officials will be selected “through an open, transparent, and merit-based selection process.”
This will provide for better governance (although Strauss-Kahn’s leadership has been exemplary) and will enhance both institutions’ legitimacy in the eyes of developing nations.
So the IMF now finds itself at the center of the economic universe once again. How will it choose to deploy its newfound power?
The greatest risk is that it will once again overreach and overplay its hand. That is what happened in the second half of the 1990s, as the IMF began to preach capital-account liberalization, applied over-stringent fiscal remedies during the Asian financial crisis, and single-handedly tried to reshape Asian economies. The institution has since acknowledged its errors in all these areas. But it remains to be seen if the lessons have been fully internalized and whether we will have a kinder, gentler IMF in lieu of a rigid, doctrinaire one.