Commentary: A To-Do List For The IMF
As Rodrigo De Rato prepares for his first annual meeting as managing director of the International Monetary Fund in early October, he could be forgiven for feeling pleased with the shape of the global economy. Despite a 40% surge in oil prices, the world is on course to record its best performance in four years, with gross domestic product expanding at a better than 4.5% clip in 2004. Emerging-market countries are enjoying an economic revival that's making them less vulnerable to currency crises. And financial markets remain calm, confounding worrywarts who prophesied turmoil once the Federal Reserve began raising interest rates.
But de Rato should resist complacency. There's trouble bubbling beneath the surface for the world economy and the IMF. World trade and finance are becoming increasingly unbalanced. The U.S. current-account deficit has ballooned to more than $500 billion, yet America continues to suck in imports and capital from the rest of the world. Europe's recovery has lagged badly, especially in Germany. Much of Asia still relies on exports to fuel growth, and has amassed huge reserves of dollars in order to keep currencies cheap. Add it up, and there's growing risk of another dollar nosedive. If the adjustment isn't orderly, the global fallout could be severe.
As if that weren't enough, the Fund faces problems of its own. Asian nations, still smarting from the heavy-handed treatment they got from the IMF during the region's crisis in 1997 and 1998, are discussing ways to use their huge reserves to insulate themselves from the Fund's influence, even to the point of starting a rival institution. What's more, nearly three-quarters of the IMF's $100 billion in loans are in just three countries: Argentina, Brazil, and Turkey. That capital is not available to be deployed in case major crises erupt elsewhere.
To cope with the problems ahead, de Rato needs to change the way the IMF does business. The Fund has to get tougher in dispensing advice to industrialized countries, including the U.S., and in pressing Asian nations for changes in their currency policies. It must enhance its ability to anticipate crises by beefing up its economic oversight and resist pressure to throw good money after bad when they occur. And it needs to shake up its voting structure to give Asia, which accounts for about one-quarter of the global economy, greater say in running the Fund. That also would give the region less incentive to break off on its own.
It won't be easy. Some of these issues have been batted about for years with little change. But de Rato has several things going for him. His success as Spain's former Economy Minister gives him the prestige and political skills some predecessors lacked. Also, IMF reform is already on the international agenda. The U.S., which provides 17% of the IMF's finances, and other industrialized nations are reviewing both the Fund and the World Bank to determine how they can be updated to better meet the needs of an interconnected world economy.
Here's a list of what needs to be done:
Back To Basics. When it was formed 60 years ago, the Fund concentrated its advice and attention on the major industrial countries and the management of the global currency system. But that changed over the past two decades as the IMF evolved into a financial firefighter in emerging-market emergencies. The IMF needs to return to its roots. The trouble, experts say, is that the IMF's influence with industrial nations is basically limited to jawboning. To get his message across, de Rato may have to drop diplomatic niceties and talk tough. The U.S. needs to slash its $400 billion federal deficit in order to boost savings and lessen America's dependence on foreign capital to finance its current-account shortfall. And Europe has to make politically painful reforms of its labor markets and economy to spur growth at home.
China and other Asian nations need to adjust as well. "One of the original reasons the IMF was set up was to stop countries from pursuing beggar-thy-neighbor currency policies," says former Wall Street trader Desmond Lachman, now a fellow at the American Enterprise Institute think tank. But that's exactly what Lachman and others claim Asian nations are doing by buying up huge gobs of dollars to keep their currencies from appreciating. So far, the IMF's pleas for Asian leaders to loosen their grip on their currencies have gone unheeded. The Fund will have to be more forceful, and remind them that the IMF charter prohibits currency management to gain competitive advantage. The Fund should dust off a policy tool it hasn't used since 1987 and conduct special consultations with countries it suspects of currency manipulation.
Learning To Say No. Save for exceptional circumstances, the IMF is supposed to limit its lending to countries in trouble, according to a formula based on the size of their economies. But recently, more cases have been deemed "exceptional." That's why the IMF now is so overexposed to Brazil, Argentina, and Turkey. Had the IMF followed the normal formula for Argentina, it would have capped its loans at $9 billion, rather than the $15 billion it has doled out so far. To address that problem, the Fund last year adopted new guidelines for determining when it could exceed its normal limits. But it quickly ignored those new rules by granting yet more jumbo loans to Argentina and Brazil. Former IMF official Morris Goldstein, now at Washington's Institute for International Economics, argues exceptions should only be granted if nations holding 75% or more of the Fund's voting power approve. Right now, all it takes is a simple majority.
Looking Around Corners. By the time a country comes to the IMF for help, its options -- and that of the Fund's -- are limited. Far better, then, for the IMF to anticipate trouble and work with the country to defuse it. In 2001, the IMF set up a small program to spearhead its attempts to identify stress points in the global system. The IMF should beef up that effort, as well as free up resources by reducing its regular economic reviews of each of its 184 members. The U.S. also wants the IMF to strengthen surveillance of individual countries. Right now, IMF officials who are in charge of lending to a country are also responsible for assessing whether that nation's debt levels are sustainable. To avoid potential conflicts of interest, Washington wants a separate IMF team to conduct such oversight. "It would improve the quality of surveillance," says Randal K. Quarles, Assistant U.S. Treasury Secretary for International Affairs.
A Fair Share. A country's voting share in the IMF is supposed to be tied to the size of its economy. Those voting quotas haven't changed since 1998. But since then, Asia has grown rapidly, meaning the region is vastly underrepresented at the IMF. South Korea's economy is more than twice the size of Belgium's, yet it has less than half the voting rights. China's voting share in the Fund is smaller than Italy's, even though its economy is much bigger. Voting rights should be rejiggered to make the IMF more representative of the world, and a more attractive forum for Asian nations. That, however, would mean taking votes from other countries, particularly smaller European nations, that stoutly resist any such change.
De Rato is under no illusion about the difficulties ahead. In his former position as Spanish Economy Minister, he once said the IMF managing director job is "impossible to do well." Now that he leads the Fund, it's up to him to prove that assessment wrong. There's a lot at stake for the world economy -- and the IMF itself.
By Rich Miller