LONDON: The G-20 summit last week in London was considered a major coup for the International Monetary Fund (IMF), effectively the “Global Fund of Last Resort”, for world economies.
The G-20 leaders agreed a total of $1 trillion in additional funding for the IMF which includes the $250 billion already pledged plus a $500 billion of new resources to help troubled economies especially in the emerging countries which have been impacted by the global financial crisis; and a further $250 billion Special Drawing Rights (SDR), the IMF’s currency introduced in 1969, that the world’s poorest countries can call on to help bail out their economies — effectively a special “overdraft facility.” The IMF will also explore the possibility of selling some of its gold reserves to provide extra funding for poor countries.
But behind the hype of these new-found resource commitments to the IMF is a potentially divisive power struggle looming between the old developed economies led by the US, UK, EU and Japan and the emerging new tiger economies led by China, India, Brazil and Saudi Arabia. This struggle pertains to the future of the IMF as an institution; its operational ethos and the control of the institution. Like the most of the post World War II and post Bretton Woods global institutions, the IMF is in need of radical change and an image makeover.
In the past because of Washington’s control over the institution as the major contributor to the fund and its host, it was more-or-less the IMF imposing its will on the global economies especially the developing countries through the controversial structural adjustment programs (SAPs) in particular. The IMF was reluctant to engage on a primus inter pares basis and even to allow China and Russia to become members in the past. If the fund powers-that-be did not like a particular policy or development such as Malaysia’s Bilateral Payments Arrangement (BPA) or proposed Multilateral Payments Arrangement (MPA), it did not hesitate to threaten sanctions against the country through suspension or other means. If a state is considered to be a pariah state by the State Department in Washington then the fund would follow suit and suspend all funding and other support to the state.
If there were a crisis anywhere in the world such as the Latin American debt crisis in the 1990s, the Asian financial crisis in 1998, and the Turkish financial crisis in 2001, most countries run to the IMF with cap in hand pleading for a stand-by facility, sometimes to the detriment of the country’s overall economic benefit. Malaysia, under Mahathir Mohamed, was perhaps the only country to refuse any IMF assistance in such a crisis when he successfully steered the country out of the Asian financial crisis in 1998 preferring to restructure local financial sector and corporate debt through issuing local bonds.
South Africa under the new Mandela-De Klerk post-Apartheid coalition government similarly refused to go to the IMF for funding. The IMF became a love-hate figure, caricatured by some on the left as “the Gatekeeper of US Capitalism.”
How times are changing. If ever there is to be a positive impact of the current global financial crisis, it is the fact that the IMF has been brought down to earth and has been forced to admit its shortcomings in failing to act as an early warning system for the type of chaos the world economies are currently experiencing. As such, the spring meeting of the IMF at end April will be crucial because it will set the new parameters or any fundamental change of the institution.
UK Prime Minister Gordon Brown admitted that change must come and that there needs to be a more equitable match between contributions and voting rights and a say in the running of the organization. But as with the UN apparatus especially the permanent five in the Security Council, the industrialized nations will not cede powers in the IMF without putting up a fight.
The immediate commitment to increase IMF resources by up to $500 billion to $880 billion is comprised of total quotas and New Arrangement to Borrow (NAB) and General Arrangement to Borrow (GAB) plus new commitments including Japan’s bilateral credit line of $100 billion. It will be part financed first through bilateral contributions and later by an increase in the NAB.
Analysts such as Ousmene Mandeng of London-based Ashmore Investment Management, warn that “bilateral contributions unlike a quota increase, avoid having to revisit the current quota distribution of the IMF. The quotas have been criticized by the G-20 in November as not being sufficiently representative. Yet, the summit now reaffirms the need to implement the quota distribution agreed in April of 2008. This seems a step backward in terms of the objectives of reforming the international governance structure. While bilateral contributions allow for a speedy implementation, it seems unlikely that countries will want to provide more resources to the IMF without having a greater say in the institution eventually.”
The general SDR allocation of $250 billion, according to Ashmore, seems to be an acknowledgement of Russia’s and China’s recent proposals on reserve currencies that have promoted the idea of a more prominent use of SDRs. Behind Russia’s and China’s proposals is a concern of the dominance of the dollar as the international currency and that the international economy is too reliant on the US dollar.
Both are calling on the formation of a new international reserve currency or the use of a broader range of currencies to manage international liquidity and thus provide greater stability to the global economy. “Both Russia and China recognize that the international economy should not be tied down by the domestic policy objectives of a single issuing country associated with the so-called Triffin dilemma that was concerned with the supply of reserve assets and the effect on the dollar,” stresses Mandeng. However, any replacement of the US dollar as the international reserve currency will be long and drawn-out.
Saudi Arabia has confirmed that it will consider contributing to IMF funds if quotas are increased. According to the IMF, the Kingdom currently contributes 3.21 percent of the total IMF capital through its quota and has 3.16 percent of the total votes.
