A striking feature of the debate over the deepening credit crisis is the absence of one formerly ubiquitous voice: that of the IMF. Despite the likely impact of financial turmoil on economic stability in developed and emerging economies alike, the Washington-based multilateral has been conspicuously absent from the public debate on the subject.
The contrast with the Fund’s muscular, hands-on approach during Asia’s financial crisis a decade ago and other emerging market blow-ups could not be more stark. On the one hand, this shows up an effete institution grappling with questions over its finances, function and future. But in recent years the Fund has failed time and again to reach out, give clear messages, and make recommendations to its main shareholders, largely because it is a body beholden to the dictates of precisely those members.
Yet today, the stakes could not be higher: financial market turmoil has raised the spectre of a sharp global economic correction, while exposing the need for an institution with the authority and expertise to advise countries on supervisory and regulatory issues of systemic importance.
G7 finance ministers, meeting in Tokyo last weekend, addressed this issue by calling on the IMF to focus part of its efforts on monitoring potential flashpoints in the financial system. Gordon Brown, a past chairman of the IMF’s governing body, has also stepped up his calls for the Fund to renew its focus on economic and financial surveillance, but with a view to preventing crises rather than simply managing or resolving them as before. Specifically, he has called for an “early warning system” for financial turbulence, involving regulators and supervisors across the world, and coordinated by the IMF.
Sadly, these calls look increasingly hollow. For a start, US regulators are openly hostile to Brown’s plans, even though in practice they represent little more than increased communication between the IMF and regulatory authorities.
At issue is a basic unwillingness to grant an international agency jurisdiction to regulate financial markets based in member countries. The problem, as former IMF chief economist Raghuram Rajan puts it, is that some rich countries “see themselves as more sovereign than others, and their politicians brook no interference in their own domestic policies, while being fully prepared to use multilateral agencies to intervene in the domestic policies of others.”
Meanwhile, behind the scenes, the IMF’s new managing director Dominique Strauss-Kahn is taking a hatchet to the institution, under pressure largely from the US. The Fund has announced it will lay off roughly 15% of its staff - some 300 to 400 professionals - in a move viewed as a quid pro quo to secure US Treasury support for an IMF endowment.
The IMF is already reeling from salary and compensation disputes in 2007, and the new changes – which include voluntary retirement for much of the institution’s middle management – are likely to add to an internal conflict that is weakening the institution.
The Fund’s finances have long been in need of reform. But decisions on the role of the institution - in surveillance, financing, and as a centre for macroeconomic and financial policy experience – should determine its staffing and budgetary requirements and not the other way round.
Indeed, many insiders are increasingly viewing what appears to be a hurried attempt to slash costs before hammering out an agenda for the Fund as part of a thinly disguised push to kill off a global financial system ordered and managed by international institutions.
If true, this is a troubling prospect, especially in light of the recent, painful reminders that crises can come from unexpected places and spread quickly in unforeseen ways. The days of financial crises, including those that would warrant intervention by the IMF, are far from over. But without a meaningful effort to save the Fund from terminal decline and to reestablish it at the heart of the international monetary system, the future of global financial governance will remain fraught.