THE IMF’S CRISIS

Mr. Sta. Ana coordinates Action for Economic Reforms. This article was published in the Opinion Section, Yellow Pad Column of BusinessWorld, September 25, 2006 edition, page S1/5.

The debate that dominated the International Monetary Fund’s (IMF) annual meeting in September 2006 was about voice.  It was about increasing the quotas and votes of developing countries—to be precise, emerging economies, namely China, Korea, Turkey, and Mexico.

On the surface, this is not a controversial issue. Who would go against a politically correct move of increasing the voice of emerging economies?    Yet, several influential countries—particularly South American countries and some European nations—vigorously opposed the measure.

The Group of 24, the inter-governmental grouping that is tasked to concert the positions of developing countries on monetary and finance development issues, was split on the issue.  Currently chaired by the Philippines, the Group of 24 said that the initial package of the quota and vote reforms was insufficient.   But Philippine Finance Secretary Margarito Tevees, true to his character of seeking compromises, said that “there was room for improvement.”

While Mr. Teves, the chair of the Group of 24, exhibited caution and timidity as he emphasized the agreement relating to principles, the minister from Argentina, Felisa Mileci, was in fighting form as she lambasted the formula for the allocation of votes and the process’s vagueness of commitments.  Argentina, Brazil, and India—all members of the Group of 24—opposed the proposal.

The opposition to the package is two-fold.  First and foremost, those opposed question the formula for increasing quotas and votes, which  is largely a function of the current size of the economies.  Developing countries want the formula to factor in purchasing power parity (PPP).  Developing countries, in fact, account for more than half of the world’s gross domestic product, if measured in terms of PPP.

The second objection pertains to the two-stage process of increasing quotas and votes.  The first stage grants an ad hoc increase in the quotas of China, Korea, Mexico and Turkey.  The outcome for the second stage, however, is less clear, as the formula has yet to be hammered out and agreed upon.  It is the lack of clear commitments for the second stage that prompted developing countries to demand that the quota reforms be finalized at one-go.

Furthermore, the two-stage process discriminates.  The quotas of countries like China and Korea are indeed under-represented in the IMF governance.  These countries’voices therefore have to be enhanced.  However, increasing their voice should be done without disregarding the voice and economic significance of other developing countries.

In the end, despite the objection of influential developing countries, the IMF members, led by the United States (which has the plurality of voting rights) overwhelmingly approved the quota reform package.

Those critical of the IMF argue that increasing the quotas of some developing countries is a wise strategy to co-opt developing countries, lock them in, and incentivize them to rebuild an institution that is in crisis.

Increasing voice is indeed appealing for emerging markets and developing countries.  On the eve of the IMF-World Bank annual meetings, Singapore’s senior minister Goh Chok Tong remarked that “Asia deserves a bigger role in IMF.”

Some remain skeptical whether the said reform is the key to strengthening the IMF whose stature and significance have diminished.  That the IMF’s stature and image have been undermined is no longer contested.  The IMF—its imposition of Washington Consensus prescriptions—has been blamed for the failure of growth for two decades in Latin America, Africa and some parts of Asia.  As a consequence, Latin American governments and citizens have rejected the IMF.  They have proven that they can defy globalization to create conditions for growth and better living standards. Argentina’s debt default and abandonment of IMF policies have emboldened other countries in the region to fight IMF intervention.

IMF policies (ex ante such as capital account liberalization and ex post such as tight fiscal and monetary policies) also contributed to the recent economic and financial crises—the 1997 Asian financial meltdown, the 1998 Russian economic disaster, and the 2002 Argentine collapse. Since then, the IMF has acknowledged some of its mistakes.

Moreover, countries such as China, India and Vietnam that deviated from the IMF orthodoxy have enjoyed sustained high rates of growth and investments.

In the meantime, other emerging economies are distancing themselves from the IMF. The trend is for emerging economies like Thailand, Indonesia, and Argentina to refrain from new borrowing and to even pre-pay IMF obligations.  This means less income for the IMF.

In addition, countries, especially in East Asia, are building large reserves so they will no longer be at the mercy of the IMF in the event of an unforeseen crisis.

The IMF is aware of the serious problems it faces.  Hence, its managing director has come out with a document that elaborates on a strategy for the short, medium and long terms. Among other things, the strategy states new directions in surveillance with a global perspective alongside effective country surveillance; emphasis on financial market issues for emerging market economies; and debt relief, focus and flexibility for low-income countries.

Governance is a key component, as exemplified by the recent approval of the quota and voice reform package.  But as this example shows, developing countries remain unhappy with the substance and process of IMF reforms.

The managing director’s strategy is inadequate.  There must likewise be a realization that the IMF’s worldview, mindsets, and power relations need to be reexamined.  As Joseph Stiglitz once said: “At the core of many of globalization’s failures is a simple fact:  Economic globalization has outpaced the globalization of politics and mindsets.”