Last year, as the financial crisis reached global and historic proportions, many commentators identified one institution as the debacle’s great winner: the International Monetary Fund. Just two years ago, the IMF seemed to be on an inexorable downward path: its credibility and effectiveness in question, its portfolio of borrowers severely reduced, its legitimacy and governance structure under challenge, and its own finances in disarray. In fact, the Fund had started “downsizing” its staff as the only way to avoid running one of the deficits that it so strongly advises client countries to steer away from.
Against this backdrop, the world’s credit drought offered the international financial institution a lifeline. Observers predicted it would propel countries that had closed their programs with the IMF to have to reapply. Big IMF loans were back. The G20 summit in London in early April, with its dizzying figures in new funding for the IMF (The Wall Street Journal and other major outlets reported a $750 billion pledge) only made the feeling a distinct belief.
Since October of last year, the number of IMF non-concessional loans has more than tripled, while the total volume of outstanding loans more than doubled — from nearly $7.5 billion to about $16 billion. This is far from the almost $50 billion in loans that were outstanding in 2003, but does reflect a U-turn.
Still, looking beneath the surface reveals a more nuanced picture. Accounts that herald the IMF’s “revival” are premature and superficial. Recent events illustrate nothing more than the fact that the world’s largest economies, who happen to be the Fund’s largest shareholders, view it as an instrument to manage emergency crisis financing. That was never, however, in question. It was the borrowers who saw the need for substantial reform in the IMF before this emergency financing function could be played effectively and, in fact, the infusion of large amounts of funding, by freeing the IMF’s hands and relieving its fears of survival that will act against such reforms. On the other hand, there’s little that suggests a sense of renewed faith on the IMF by its main shareholders, let alone by the borrowers.
At its April summit in London, the Group of 20 countries committed to increase IMF resources through “immediate financing” from members in the amount of some $500 billion. A thorough reading of the communiqué revealed big holes in this announcement.
Less than half this amount could be actually traced back to bilateral pledges by members to the IMF. Such contributions included $100 billion that Japan pledged, and $75 billion pledged by European countries earlier in the year.
A U.S. pledge of approximately $100 billion was also being assumed in the deal. At the time of the London summit, skeptics said chances were slim that a Congress fed up with domestic bailout packages would clear the contribution. The Senate recently backed $108 billion for the IMF as part of a broader piece of legislation; approval by the House of Representatives (which didn’t pass the same version of a broader bill as the Senate did) is, nonetheless, expected. Arguably, though, skeptics weren’t so wrong.
Passing the measure required the resourceful accounting trick of portraying the real cost of the contribution as much lower than it really was. It also called for attaching a measure to a supplemental military spending bill to bypass calls for hearings and debate on the proper oversight and reform that the Fund should be called to perform for this funding increase. Including it in the supplemental budget bill also made it harder for lawmakers to oppose it, and it shows that the vote didn’t reflect support for the IMF in Congress.
More important than the actual amount of the contributions was the mechanism used for making them. The major announcements of immediate funding increases weren’t in the form of a commitment to contribute more capital to the institution, but through a set of bilateral credit lines that acts as a supplement to the IMF’s capital. These credit lines are collectively called the “General and New Arrangements to Borrow.” An infusion of capital to the institution could have been taken as an indication of renewed trust in it, a will to structurally strengthen the IMF and a show of commitment to stay with it for the long haul. Contributing to those bilateral credit lines, on the other hand, suggests a sense of caution. Unlike a capital increase, they can be easily revoked once the moment of emergency fades away. If you think in terms of rescuing a bank, this is the difference between buying more shares and promising that if it needs money in the future you are going to give it some. Which of these two behaviors would you say reflects more confidence on the institution?
The size of the increase in bilateral credit commitments is such that structurally changes the institution in unpredictable ways. The proportion of capital in the resources the Fund has to lend would go from 80% — that is, the primary portion of its resources — to 40% — a minority portion, and potentially even less.
Reportedly, the lack of agreement to approve increases in capital, rather than in the bilateral credit arrangements, has been the reason for China to withhold its contribution. In a blunder that got little press attention, the London summit’s host government announced $250 billion in immediate contributions, which allegedly included $40 billion from China. Yet, no Chinese government sources would confirm this. As the communiqué issued by the policy-making committee of the IMF later in April made clear, China is effectively not contributing to the New Arrangement to Borrow.
The behavior of other major contributors, such as Japan, fuels further doubts about commitment to the IMF. Last January, Japan was the first country to announce a bilateral loan to the IMF in the amount of $100 billion. But last month it announced a contribution of over $38 billion to the Chiang Mai initiative, a network of bilateral currency swap arrangements among Asian countries seen, for a long time, as a potential source of competition to the IMF. On top of this, it is setting up a $100 billion bilateral currency swap scheme for Asian countries. This would effectively mean its own bilateral, direct line of credit for such countries, should they need emergency financing.
Another important point that gives away the persistent distrust on the IMF by its main shareholders is the way they’re dealing with the issue of surveillance. However much the Group of 7 trusts the IMF with the management and prevention of crisis in less-developed countries, they have systematically refused to trust the IMF with such a role in the global economy, especially the implications this role would carry for their own domestic policies.
As a result, while rich nations pay lip service to the need to strengthen the IMF’s surveillance functions, also known as its capacity to play an “early warning” function, it’s usually surveillance of developing countries — those that have actually less responsibility in the functioning of the global economy — that they reference. The industrialized countries have kept their ability to dodge the IMF’s prescriptions safely protected.
Since the late 1990s, several observers had warned about the unsustainable imbalances that were building up. The attempt by emerging markets to self-insure against sudden capital outflows led them to grow large trade surpluses and build huge reserves in U.S. dollars which, in turn, provided the demand for U.S. dollars that permitted the growth of unsustainable U.S. trade deficits.
Article IV of the IMF’s Articles of Agreement requires it to prepare, every year, an individual country report assessing its macroeconomic policies. The reports are usually known as “Article IV Surveillance reports.” In these routine surveillance reports for “advanced economies,” the IMF started building a component in the late 1990s that looked at the “spillover” effects of macroeconomic policies in such countries. But since the countries capable of causing the most damage to the global economy don’t depend on the IMF for funding, IMF recommendations to them fell in deaf ears.
In 2006, the IMF was endowed by its members with a new procedure for “multilateral consultations on surveillance.” The mechanism would allegedly provide a forum for countries with systemic impact to coordinate their policies. Suitably, the first topic to come up for consultations was the buildup of global imbalances. What was lost amidst the great fanfare of the announcement was that this function wasn’t very different from the Article IV assessments of systemically important economies that the IMF had been carrying out since the late 1990s, and for which it had little to show. There was, likewise, little difference between the newly announced “multilateral consultations” and the routine discussion of Article IV reports by the Board that had been so easily ignored by large countries. Over time, the results of the new procedure proved equally innocuous.
Yet, in a very similar vein to what happened in 2006, the G20 statement tries to project a sense of renewed mandate for surveillance over the global economy for the IMF. The G20 speaks of a surveillance and “early warning” function, to be jointly played by the IMF and the Financial Stability Board. But the reality is no changes were agreed upon that would actually empower the IMF to play a more prominent role over the economies that matter — which happen to be its dominant members.
Clearly, there’s not much evidence of a change of heart among IMF shareholders, particularly the richest industrial countries, to revive and strengthen the IMF. That doesn’t mean that the wealthier nations don’t see the IMF as an instrument for managing and channeling assistance, in a selective and conditioned way, to emerging markets hit by the global financial crisis. But this isn’t really a different policy approach than what they had espoused in the past. The large increases in funding, however, will certainly shut down the limited movement towards reform that was taking place within the institution. By positioning the IMF as the necessary creditor of last resort in times of crisis, they may force borrowing countries that had disengaged from the institution to have to re-engage, in the process weakening their hand at demanding substantial reform.
Many in civil society and academia have been demanding an alternative approach that involves better prevention measures to avoid crises while ensuring that, in case they happen, emergency financing is available without conditions that generate poverty and unemployment and limit growth and development. The prevention of crisis calls for more policy space to discipline capital movements and an adequate system of regulation and incentives that tackles financial institutions not only in the host, but also in home countries. An international system for sovereign bankruptcy, by putting some restraints on the side of the creditors, would go a long way to avoid devastating crises.
In turn, an alternative means of emergency financing will only take place with a very different kind of governance for the institutions that provide it. One shouldn’t stop calling for the democratization of the governance of the Fund, but dramatic changes to emergency financing are unlikely to happen in the absence of monopolies like those that the International Monetary Fund has held in the past and is now trying to cement. In this regard, the emergence of vigorous regional financial and monetary institutions is a welcome development of the past few years that should continue to be encouraged.