International

IMF Member states

The Silent Revolution Inside IMF

Stephan Richter

The International Monetary Fund (IMF), at long last, has begun to open up. Gone are the days when it acted as a handmaiden of Western, mainly US, economic orthodoxy. It is even throwing a gauntlet down to the mighty US Federal Reserve, questioning the effects its constant monetary boosting has had on the rest of the world.

Given that the IMF is the key arbiter on many key issues of global finance and economics, and hence also over global fairness and equity, the change should be greatly welcomed. Over the past decade, the reform debate had centred mainly on giving emerging market economies more voting power, by commensurably reducing the voting shares of the "rich" world.

Given the global economic dynamics, the adjustment was of course long overdue. One clear indication is that the IMF's senior-level staff members have become much less American and less European. But now, the first substantive consequence of these shifts is beginning to emerge.

The frontline of this fight is the IMF's Research Department, where old school guys [yes, mostly guys] and rich country governments battle the new thinkers. Take, for example, the third quantitative easing (QE3) the Fed announced in late 2012. From the American perspective, the big boost in money supply is intended to stimulate economic growth - and therefore job creation - at home.

	IMF headquaters in Washington DC.

The extent to which these measures actually achieve that goal continues to be the subject of much controversy even in the US. What is not controversial is that these measures can have a negative impact on emerging market economies. And policymakers there will generally agree that it is important to have a growth-oriented US economy.

But there is growing concern as to whether US authorities are not increasingly poking in the dark with their policy measures. QE3 has mainly boosted the stock market, not the real economy - and even the stock market effect is wearing off.

Either way, emerging market economies are no longer willing to acquiesce. Brazil has stepped forward to lead the defence. That has upset many US policymakers. Perhaps not surprisingly, that has also generated a lot of negative press about Brazil in the US media.

Enter the now more open-minded IMF, as Boston University professor Kevin P. Gallagher has documented, it has issued a whole range of reports that cast a critical eye on the spillover effects that quantitative easing in the US has had on emerging market economies.

The IMF found, for example, that lower interest rates in the US were associated with a higher probability of a drastic increase in capital flow into emerging market economies. And it declared that such increase in capital flows can cause currency appreciation and asset bubbles, which in turn can make exports more expensive and destabilise the emerging market economies' domestic financial systems.

In addition, the IMF is warming up to the view that, in order to fend off these problems, it may well be advisable to use counter-cyclical capital account regulations, as Brazil and South Korea have begun to do. The use of such regulations flies in the face of the old IMF orthodoxy. At the behest of the US Treasury, especially under secretaries of Treasury Robert Rubin and Larry Summers during Bill Clinton's presidency, it preached the "gospel" of unfettered capital market liberalisation to the newly emerging economies.

What shines through all these technical-sounding arguments is that the burdens of adjustment are no longer automatically imposed on the recipient countries in the South. The countries in the North, mainly the US, may need to regulate the outflow of capital from their shores.

Powerful new voices, such as Singapore's long-time Finance Minister Tharman Shanmugaratnam, who serves as the chairman of the IMF's key Policy Steering Committee, and his Brazilian counterpart Guido Mantega have seen to it that the notion of "global governance" finally gets some real-life meaning.

Global governance reform is about much more than changing voting rights in the IMF's and the World Bank's boards. It concerns a very hands-on process to ensure a fair and equitable share of the burdens of adjustment in the global economy and finance.

The success of this campaign owes much to the fact that the richer countries from the South now act very much as global lenders, too. As a result, it can no longer be said that a bigger role for the emerging market economies would mean putting the borrowers in charge of an institution that ought to be rightfully controlled by the lenders.

The world at large has reason to rejoice in the fact that the IMF is taking off its self-imposed ideological blinders. If the current trend of change continues, and all indications are that it will, it would represent a big step forward for better global governance.

That this is happening in the field of global finance makes it that much more meaningful. It is a key step in reining in an industry that has completely lost its focus on serving the real, not the surreal, economy and whose machinations have proven to have effects similar to nuclear radiation.

The author is the publisher of The Globalist, president of The Globalist Research Centre and a former consultant to the IMF.

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