With the global balance of economic power shifting, the role the IMF should play is increasingly uncertain.
As the International Monetary Fund’s lending falls to a fraction of the past and it forecasts its first losses in decades, the future role of the Fund is coming into question.
“Reform of the Fund is needed,” says the Institute of International Finance (IIF), the global association of 345 financial institutions, in a formal letter to the IMF’s policy committee. “A broader, systematic approach is required if the stability of the international monetary system is to be reinforced and the role of the Fund adapted to meet the needs of today’s and tomorrow’s global economy.”
Clearly, the IIF’s eight-point reform programme and the IMF’s own strategic review acknowledge the impact of the increasing globalisation of financial markets and the growth of net private capital flows to emerging markets to a record $400bn last year.
But while it is unassailable that the global economy is in the midst of a massive transformation, with China, India, Brazil and Russia leading the emerging economy charge, it is not clear how the global financial infrastructure is adjusting. And it is not clear what role the IMF can and should play in the future.
The IIF says: “The IMF should take the lead on macroeconomic policies, financial sector issues and related structural reforms. The IMF should adapt its governance structure to global economic realities.”
All this sounds fine in principle, but just like negotiations for the Doha trade round, getting firm agreements on changes is the critical difficulty. And the major economies of the US and Europe are likely to be key stumbling blocks.
Is the IMF likely to ever have the clout to impose its macroeconomic policies on key economies such as the US, the cause of so many global economic imbalances? And are the key western European states going to easily give up their quotas and votes in the IMF in favour of the rising Asian stars of India and China?
In an increasingly globalised environment, the IMF, in its current form, is finding itself increasingly irrelevant.
Change and new direction is what it needs to be effective. But that will only happen if the 20th century powers, the declining US and European economies, make way for the new economic realities, and that appears to be politically unlikely.
