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The return of the Fund

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31 March 2010 10:57

I've noted before that one of the early winners to emerge from the global financial crisis was the International Monetary Fund. 

The latest evidence of the Fund's resurgence came with last week's news that Berlin would get its way, and that the IMF would supply some of the financial firepower for the proposed safety-net for Greece. This was despite some deep reservations elsewhere in the EU. 

If Greece does end up drawing on IMF support, it will mark another historic moment. Until Iceland turned to the Fund last year, the last time a Western European country had received IMF funding was in 1976 when the UK ran into trouble. Until now, no member of the euro zone has had to rely on IMF money, although Hungary's decision to approach the Fund in 2008 meant that it was the first EU member to be bailed out since the UK.

Before the GFC, the IMF was in pretty poor shape: its reputation in Asia continued to be tarnished by the nature of its response to the 1997-98 financial crisis, its finances were being squeezed by a dearth of clients, and the big developing countries had joined the big developed economies in largely ignoring its policy advice except when it pleased them to do otherwise. The Fund seemed to be facing a future of downsizing and declining relevance.

The crisis has changed all that. 

With Eastern Europe and parts of the Former Soviet Union particularly hard hit, the IMF has been called in to support Hungary, Latvia, Romania, Serbia and the Ukraine, among others. The London Summit meeting of the G20 last April delivered a major increase in financial resources that was intended to 'supercharge' the Fund. The IMF has also revamped its approach to lending. 

These changes have prompted excited talk of an IMF 2.0 and by last September, in a review of its lending programs in 15 emerging markets, the Fund felt able to award itself a pat on the back as regards its new approach. The Fund is also changing in other ways: I posted a little while back about some shifts in the Fund's position on a series of significant economic policy issues.

One important question is whether this reinvigoration of the IMF will similarly reinvigorate the case for IMF reform, in particular when it comes to increasing its representativeness. There have been some modest changes in that direction: the appointment in February this year of Deputy PBOC governor Zhu Min as special adviser to Managing Director Dominique Strauss-Kahn was widely interpreted as recognition of China's increased influence.

Even this shift was controversial in some quarters, however, with critics noting that the Fund continued to refrain from opening up its top jobs to a transparent, competitive process. With rumours that Strauss-Kahn himself may step down ahead of time, there may be a major opportunity for the Fund to respond to such critics. But don't hold your breath. 

The main focus when it comes to improving the Fund's legitimacy is on the reform of quotas – which largely determine voting power – in order to give a bigger voice to the major emerging markets. Here progress has been painfully slow. 

Back in April 2008, after two years of wrangling, the Fund finally agreed a package of measures designed to bring the institution's governance more in line with that of the changing nature of the world economy. The proposed changes were actually very modest and represented little more than a down-payment on further reform. Even so, they have still to be implemented.

Further efforts in this direction came at the September 2009 G20 meeting at Pittsburgh, when leaders promised to deliver a further shift in quota shares 'to dynamic emerging market and developing countries of at least five percent from over-represented to under-represented countries.' (The major emerging markets, led by the BRICS, had asked for a seven percent shift.) Again, implementation remains a key challenge.

The big problem with quota reform is that it is a zero-sum game: for emerging markets to get a bigger voice in the Fund, other countries will have to see their role shrink. With Western European economies set to be among the biggest losers, European appetite for quota reform has been noticeable by its absence. In this light, the Fund's recent re-engagement with the EU seems unlikely to convince them to change their minds.

Photo by Flickr user International Monetary Fund, used under a Creative Commons license.

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