The International Monetary Fund (IMF) has reinvented itself as a new, user-friendly, more politically sensitive organisation.
Given the experience of some borrowers during the Asian and Latin American crises a decade ago, this was entirely necessary. But care must be taken not to go too far lest the organisation lose its purpose as the harbinger of tough reality.
The IMF's harsh stance in key emerging markets 10 years ago led the fund to become an organisation hated not only by governments, but also by the general populace, leading to extreme policy outcomes. Most particularly, Asian and Latin American governments built up reserves to very high levels, so bringing down global yields and contributing to the asset bubble that precipitated the current crisis.
Since then, the IMF under Dominique Strauss-Kahn has reviewed its operations, pulled back on the worst excesses of 'conditionality' and introduced fast-approval standby loans such as the Flexible Credit Line, taken up by middle-income countries such as Mexico, Poland and Colombia. There are now plans for a similar facility for lower-income countries.
But in offering carrots in return for good behaviour, the IMF cannot afford to give up its sticks completely. Key emerging markets fared better in the current crisis because the shock of the last one led to better and more conservative policy-making.
Breaking the rules
European nations, for the most part, have spent the past decade breaking all the rules by running up large debt-to-gross-domestic-product ratios and huge budget deficits.
Democratically elected governments have conspired in this malaise by promising jam today while not facing up to the bills falling due tomorrow. The UK, for example, has one of the worst budget deficits in Europe because its previous Labour government was running deficits even during periods of high growth.
The UK's new coalition government - described by some analysts as Europe's most radical - is busy trying to balance the books without upsetting the electorate too much, large parts of whom do not appreciate the severity of the situation. This is because they have not experienced IMF-style policy-making in the same way as the South Koreans did.
Europe in general has to get used to a new relationship with the IMF, whatever the fund's new role. Europe is now the main recipient for funds and assistance and its voting rights are likely to be reduced again at November's G-20 meeting in Seoul.
Welcome to the new world.
