The IMF Spring Meetings: Overcoming Fuzzy Math and Stigmaby Arvind Subramanian | April 22nd, 2009 | 04:50 pm
The road show for the guardians of the international economy moves this weekend from London, site of the G-20 summit earlier this month, to Washington, site of the annual meetings of the International Monetary Fund (IMF), the World Bank, and the world’s finance ministers and central bankers. We can hope that these leaders will translate their record of spectacle and grandstanding into the more mundane tasks of carrying out the commitments made previously. Two accomplishments would make the meetings a success, at least for the Fund.
Resolving the Fuzzy Math: Can the IMF Do Better Than Wall Street?
The G-20 summit called for expanding IMF resources to include $250 billion in new Special Drawing Rights (SDR) issuance and new credit lines from member countries of $500 billion under the so-called New Agreements to Borrow (NAB arrangements).
Since the London summit, however, the numbers look like they may be shrinking. The IMF now suggests that the “commitment” is to increase the NAB by $250 billion, implying that the higher $500 billion number is more intention than commitment.
The change in wording and the numbers suggest that there has been difficulty in getting countries to pony up the additional resources. Adding together the actual and likely contributions (Japan, $100 billion; Europe, $100 billion; China, a conditional $40 billion; United States, an intended $100 billion; Canada, Switzerland and Norway, $25 billion) leaves the IMF short of the $500 billion figure unless there are hefty contributions from the Middle Eastern countries.
The meetings will be an unambiguous success if the $500 billion figure is reached. If not, the world will have reason to be skeptical about the grand pronouncements of leaders. It would be much more transparent for the IMF to declare a shortfall if indeed there is one, instead of fuzzing the math or redefining the goal posts. This is not a good time to emulate Wall Street accounting gimmicks.
The Stigma Problem
The IMF deserves credit for changing its lending practices as a way of overcoming the Stigma Problem, the left-over practices of harsh conditionality on loans in the past that has made potential borrowers wary of approaching the Fund for help. The IMF’s new Flexible Credit Line, which would provide quick-disbursing and relatively unencumbered money, is the flagship program for the IMF’s new kinder, gentler business model. It has attracted three clients already: Mexico, Poland, and now Colombia. A clear indicator of success for the IMF would be an expansion of that client list to 10 or 15 countries, especially if key countries like Brazil and Turkey signed up. And, if even one Asian country could be persuaded to join the list, the IMF could declare a major victory.
The IMF and the Long Run
While these are the benchmarks for evaluating the short-term success of the IMF, its long-run relevance and viability will hinge on addressing three additional issues:
Addressing the problem of global imbalances will require countries that amass huge trade or current account surpluses to limit their mercantilist practices. But how can the IMF, with its limited powers of enforcement, get surplus countries to do so? This was a problem that obsessed, and eventually eluded, even Keynes. And the G-20 declaration had no effective answer to this issue either. Aaditya Mattoo and I have made a proposal in a recent issue of Foreign Affairs for the IMF and the World Trade Organization to jointly tackle this problem. There is clearly a need for more ideas here.
The IMF’s long-run viability requires all countries to have a stake in the institution. Governance reform that expands the say of developing countries in the Fund’s activities is not on the agenda until 2011. But this must change. A greater regulatory role for the IMF, which would be desirable, is feasible only if countries feel that the referee is reliable and fair.
The crisis offers an opportunity for the IMF to demonstrate that it is not victim to dogma and doctrinaire approaches. One promising way to demonstrate this openness would be for the IMF to undertake a serious analysis of managing capital flows. Imagine if the IMF could come up with a best practice manual for capital controls and countercyclical management of the capital account. That would go a long way toward showing that it is not just business-as-usual at the IMF in terms of resources and conditionality but also of intellectual perspective.