Restructuring IMF for an expanded mandate
By Shahid Javed Burki
Friday, 27 Apr, 2009
PAKISTAN’S presence on the international financial scene will not end with the call it has made on the IMF. Nor will it end with what the finance officials have termed a successful meeting at Tokyo of the “Friends of Pakistan” group.
The world is focused on the country’s economic problems and has recognised the fact that an important way of addressing them is to provide the country with a great deal of additional finance – additional to what the Fund has already provided and what was pledged at Tokyo. As the world’s finance ministers gathered in Washington this week for the “spring meetings” of the World Bank and the IMF, they had a very full agenda. Included in it was the restructuring of the Fund. What was decided here will matter for countries such as Pakistan that will remain financially stressed for many years to come. More IMF resources could become available for Islamabad if it is is able to persuade the organisation that it has developed a strategy for development that will help all citizens. And that it has the capacity to implement such a strategy.
Bowing to the demands from large emerging markets that flexed their economic muscle at the G20 meeting held in London earlier this month, the Fund will begin the process of granting additional powers to likes of Brazil, Russia, India and China. These four countries have a nomenclature of their own – the BRICs.They will have a significantly larger presence on the economic and financial landscape compared to their collective power before the world went into a deep economic crisis. Along with South Africa, Saudi Arabia and Mexico, these seven emerging economies will have a say when countries such as Pakistan appear in the IMF court asking for financial favours.
The process of restructuring that began in London, gathered pace in Washington. When done, it will leave the institution with expanded authority to act as a global banker not just for the world’s poor countries but also for those that are rich. It will have the power to print its own money on a much bigger scale than it is permitted to do at this time. The Fund has the authority to create Special Drawing Rights (SDRs), a currency that serves an accounting rather than a transactional purpose. Some countries would like to see the SDRs become a real currency which could serve as a reserve currency augmenting if not replacing the American dollar. That that should happen was a demand put forward by China before the G20 convened in London.
The most important change for the Fund is the way the developing world is beginning to look at it. This change in attitude was nicely summed up by the Brazilian president Luiz Inacio Lula da Silva, commonly called Lula. “I spent 20 years of life carrying posters that said ‘IMF out’. Now my finance minister says we are going to lend money to the IMF.” Lula was referring to his country’s decision to provide the Fund $4.5 billion as part of the trillion dollar package of resources that was being put into the Fund’s coffers.
This was a remarkable turn-about for a country which received a massive bailout from the IMF in the 1990s. As vice president in charge of Latin America and the Caribbean, I was a member of the team of international negotiators who worked out the deal with the country. Such was their suspicion of the Fund, that the Brazilians insisted that they would only work with the agency if the World Bank and the Inter-American Bank were also involved. The two banks did get involved and Brasilia signed the deal.
There was a reason for Brazil’s unease about going to the Fund unaccompanied by development institutions since the agency had established a record in the developing world that brought it a bad name. That was one reason why President Lula, when he was a trade union leader, went around carrying posters against the Fund. The institution’s current leadership insists that new Fund will be really different from the one that got to be despised in the developing world.
If the Fund does reform itself, it will be going through structural change for the third time in its 64 year history. It was originally conceived as one leg of the three-legged stool that was to underpin the international economic system after the end of the Second World War. It was to maintain stability in the global currency markets under a system of fixed exchange rates. The rates were set against the US dollar; the United States agreed to maintain a fixed price for gold in terms of its dollars while all other countries fixed their exchange rates with reference to the American dollar.
Other countries could alter their exchange rates with respect to the dollar, something that was usually done at the advice of the IMF. In advising the countries to change their rate of exchange, the Fund also provided capital to help them tide over whatever difficulties they were faced with at that time. The Fund stepped in with its help since no other country or market would provide the needed financial resources. As such, it came to be known as the lender of last resort.
The Fund’s mandate changed in the early 1970s as President Nixon delinked the dollar from gold and most countries, in particular those from the developed part of the world, floated their currencies. This was the start of what came to be called the process of “globalisation”. The process exposed developing countries to new forms of risks. Rather than each country getting into difficulties, contagion became common as crises spread from one country to the other. Developing countries that went to the Fund for help had to sign up to undertake reforms that were part of a neo-liberal economic philosophy that came to be called The Washington Consensus.
Governments were required to severely limit their economic role by privatising the assets they held, some of which were acquired by the nationalisation of the properties owned by the private sector. This Pakistan had done in the early 1970s. When Islamabad went to the Fund on a number of occasions in the 1990s, privatisation was one of the conditions to which it agreed.
Countries with Fund programmes were also required to control their expenditures which many did by cutting their spending on social and human resource development. This affected the poor. They also had to open their economies by reducing tariffs which often exposed poor farmers to competition from rich countries. It did not seem to matter to the Fund that many rich agricultural systems were subsidised by the state.
With latest series of reforms, the IMF is entering into the third phase. Dominique Strauss-Kahn, former finance minister of France and now the Fund’s managing director, says that what will emerge after the contemplated reforms have been put in place will be very different from the institution that became controversial in the 1980s and 1990s.
“The IMF is changing, and with it there will be a sea change in the way the world economy is run”, says C. Fred Bergsten, director of the Peterson Institute for International Economics that was responsible for developing the Washington Consensus. “Their role will dramatically shift. You’re talking about monitoring fiscal stimulus, moving toward tighter regulations for financial institutions. You’re talking about global economic management in a way never seen.”