IMF: One for all
The IMF is under a great deal of scrutiny from emerging markets. Calls for sweeping changes grow louder
Calls are mounting for an enhanced role for the International Monetary Fund in coordinating global monetary policy, as the spillover from unconventional monetary policy creates waves around the world. The issue is pitting emerging markets against advanced economies over how strong a role the IMF should play and what this implies for the institutions governance.
The inflow (more than $1 trillion, according to the IMF) of money from advanced economies into emerging markets over the past five years threatens a currency and asset price collapse if much of the money flows out again in anticipation of US Federal Reserve tapering of its quantitative easing programme. There is a growing feeling that policy coordination is needed at the global level.
The global marketplace is more interconnected than ever before, and policies enacted in one country now create repercussions that no one thought would have existed years ago, Philippines finance secretary Cesar Purisima tells Emerging Markets.
He says that the US QE rounds have created a low interest rate environment at a global level, and many countries had to adapt to these new conditions. A pullback on QE, if enacted heavy-handedly, can have damaging consequences to those economies, he warns. Already we have seen bloodbaths in emerging markets due simply to the manner in which the QE pullback was forecasted, which may have later rebound effects to the US economy as a whole.
He calls on the IMF to take a leadership and advisory role to guide countries in dealing with this new reality, and to oversee a consultation and dialogue between nations on these issues.
The IMF is best situated for this function as it is one of the most inclusive multilateral organizations, so it is important that they work to make sure that the worlds policy actions are designed with inclusivity in mind, Purisima says.
Bigger countries share the same worry. Fearful of the impact that the slowing, and eventual reversal, of monetary easing could have on even the biggest emerging markets, the Brics nations (Brazil, Russia, India, China and South Africa) announced at the G20 summit in St Petersburg in September that they planned to establish a $100 billion fund to steady currency markets.
But former managing director of the Institute of International Finance and one-time deputy assistant secretary for international affairs at the US Treasury Charles Dallara argues that dealing with destabilizing capital flows should not be just an emerging markets initiative. Some collective support framework is needed, Dallara, who is now chairman of the Americas at the Swiss-based private equity firm Partners Group, tells Emerging Markets.
I think that what surely should happen is a much better ex-ante dialogue before major policies are taken by leading countries of the world with their developing country and emerging market colleagues, to at least talk through the potential implications for others of their actions. And secondly, the consideration of collective supportive action, he says. The IMF could provide the right forum for this, and [making] substantial credit lines available for countries under pressure could be confidence-inducing.
Confidence in markets is crucial, and one thing that could be done would be to find ways to demonstrate that if emerging markets are hit by temporary instability, a support framework is there, he says.
IMF managing director Christine Lagarde also suggested at the meeting of central bankers in Jackson Hole, Wyoming in August, that as a forum for international policy cooperation, the IMF is best able to help coordinate reactions to the impact of global monetary policy shifts. We can delve deeply into the policy interconnections and spillovers among our member countries. We can offer clear analysis of what can be gained by working together. And we can encourage policymakers to understand how their actions fit into the global policy agenda, she said.
The focus now on the impact of monetary tapering by the US Fed and the realization that similar tapering or tightening will come sooner or later in the eurozone too, as well as in Japan, has revived the debate over whether regional monetary funds, such as the proposed Brics fund and Asias Chiang Mai Initiative, will need to play a bigger role or whether they can look to the IMF to play a more powerful central role.
At the same time, attention has swung back to the issue of how governance of the IMF can be improved so that the institution can become a more effective organ of policy coordination. But there are seemingly intractable problems to be dealt with when it comes to governance reform, says Adam Posen, president of the Peterson Institute of International Economics in Washington.
We used to worry that the development of regional monetary initiatives was [a case of] trying to duck out from IMF conditionality, Posen tells Emerging Markets in an interview. Instead, now it legitimately seems to be more driven by the insufficiency of Asian and other voices at the IMF.
This in turn feeds in to debate over whether the eurozone has received unduly favourable treatment from the IMF during its crisis in terms of amounts of loans granted and the conditionality attached to them. I think its fair to say that the scale of the programmes in the European Union is unprecedented, and it is extraordinary to compare it to what resources were made available to Latin America and East Asia, says Posen.
This is a long-term systemic issue the problem of having too much European voice invoked in the IMF. Competing conditionality is something to worry about [but] it would be good to get IMF governance reform. The problem is that we are in a simple lock-up, which is that the Americans and the Asians and the Latins all want the Europeans to give up share [while] the Europeans, the Asians and the Latins all want the Americans to pay what we are supposed to pay in terms of Quota [increase].
He remarks that the Americans failed to get an increase in the IMF quota through Congress, which means that the process is two years behind what was promised, and so therefore the Europeans have an excuse to drag their feet.
Its a bad situation, and understandably the Asians and the Latins are saying we will just try and take care of ourselves because youre not dealing with the problem. This is not a failure of the IMF. It is a failure of the European and American governments. The IMF is actually trying to do the right thing. This is a no confidence vote from the emerging markets but not in the IMF, Posen says.
Some policymakers in emerging countries agree with this view. Czech central bank governor Miroslav Singer believes that the IMF must focus on measures and activities that will restore the trust and confidence of its non-European members.
The IMF was badly hurt by its role in resolving the eurozone crisis and by its lack of push for reform of the governance of international organizations, Singer tells Emerging Markets.
Riad Salameh, Lebanese central bank governor, says the IMF should take a closer look and launch initiatives targeting banks in emerging countries, considering that these countries are recording a deceleration in growth and a capital flight, due to the tapering announced by the US Federal Reserve Board that will undoubtedly affect banks.
The Fed tapering can engender liquidity problems for countries and banks in emerging markets. It can lead to currency volatility and to higher interest rates, thus worsening the economic situation, Salameh says.
But there are those officials who believe the fund should focus on resolving the problems of its richer members as prosperity in the West could mean better trade opportunities for developing markets and could actually improve their economies.
I believe the IMF should set as its top priority the effective resolution of the European crisis, which is a big risk to the world, and scenario planning for dealing with crisis in the event of any meltdown, Sanusi Lamido Sanusi, the central bank governor of Nigeria, tells Emerging Markets. On the other side of the world, in Latin America, Colombian finance minister Mauricio Cárdenas has a similar view.
The IMF has to remain focused on economic consolidation in the developed world, Cárdenas tells Emerging Markets. An independent and loud view is essential in order to avoid negative externalities from abrupt changes in fiscal and monetary policy in the US.
While emerging economies enjoy some sympathy for the predicament they find themselves in as a result of QE exercises by the worlds leading economies (and now the eventual reversal of those policies), they are not excluded from blame. Analysts say that some emerging markets have been better than others at ensuring that, when the liquidity tide goes out, they are not left on dry land. Countries with high current account deficits and which have liberalized their current accounts are much more exposed than those with surpluses or those that have enacted some form of capital controls, although experts agree that, over the long term, it is much better for a country to remove barriers from capital flows.
Despite the turbulence created in emerging economies by the impact of unconventional monetary policies in the advanced economies, Lagarde insists that the impact so far has been positive. The policies, she says, helped prevent a collapse of the financial system and of activity. This was the case with quantitative easing in the US and large-scale asset purchases in the UK. Later, the ECBs Long-Term Refinancing Operations and Outright Monetary Transactions significantly reduced the tail risk of a euro area breakup. Unconventional monetary policy, she insists, is still needed in all places where it is being used, albeit longer for some than for others. In Europe, for example, there is a good deal more mileage to be gained from these policies. In Japan too, exit is very likely some way off, Lagarde says.
Arguments that the IMF has applied different or double standards to advanced (European especially) economies compared to emerging markets in terms of policy demands made upon the two groups have been heard with increasing frequency, as turbulence has engulfed a wide number of these countries. Views differ on the truth or otherwise of this assertion.
Brazils representative on the IMF executive board initially abstained from approving the funds most recent 1.8 billion euros contribution to Greeces bailout, as Paulo Nogueira Batista, who represents 11 Central and South American countries on the board, argued that Greeces political and economic difficulties confirm some of our worst fears, and argued that the eurozone country would never be able to pay back.
But Brazil quickly reversed this hard-line stance, saying it had not authorized its representative to withhold support for aid to Athens, while finance minister Guido Mantega said he fully supported the IMFs aid to Greece.
This stance, however, may have brought out in the open a fear that is eating quietly away at policymakers and officials involved in the eurozone bailout: namely that, indeed, after the private sector had to take a hit on the debt it was owed by Greece, it may be the official sectors turn to write off some bad debt, and not just in Greece.
The scale of debt in Greece or Italy is such that it cant be repaid, says London School of Economics professor Charles Goodhart. The Greek private sector [bondholders] got a haircut, the public sector got none. There is no likelihood that the debt to the IMF or the public sector will be paid. The IMF, the ECB and the EU argue with each other; each wants to ensure that it is the one that will get paid. But the official creditors are not going to be repaid in full, and this story is going to be played out over the next few years.
Claims that the IMF has been soft on Greece and other eurozone countries find little support in Washington, however. I have been somewhat surprised at the attitude of some developing countries about IMF support for Europe during these last years, says Dallara. I recall clearly during the 1980s because I was on the IMF Board at the time how many programmes we provided in support of Brazil and Argentina and Mexico and other countries in Latin America. It would have been easy for Asia or Europe to say at that time that too much money was going to Latin America. Where a region is under pressure, it needs support.
Tim Adams, former under-secretary for international affairs at the US Treasury, and now president and CEO of the Institute of International Finance, says bluntly that the IMF is for all of its members not just for emerging markets. There are going to be instances where more developed and emerging economies will need external support, and the IMF needs to cater for both, Adams tells Emerging Markets. If you look at the funds role in Greece, it is really quite small relative to Europe generally, and I think it was more about the role of conditionality and having external pressure to enforce a certain amount of conditionality and policy [implementation] than it was about financing, he says.
Purisima reiterates that the IMFs leadership role should extend to solving the new problems that the interconnected global financial system has created. Now would be a good time to create an international system of taxpayer identification numbers with a unified format across the world, to make it easy for a taxpayers home country to track their income abroad, he says.
We learned in our drive to curb tax avoidance in the Philippines that tax evaders in one country often are tax evaders in multiple jurisdictions. A global system of these numbers, which in principle should be required to do business internationally, would help countries enforce tax administration more effectively.
Another area that the IMF could explore is that of credit facilities targeted at the needs of emerging economies, he says, giving the example of typhoons that cause billions of dollars of damages across several countries in south-east Asia every year, leading in turn to lost potential across the globe as factories that supply businesses in other countries grind to a halt.
I believe that the IMF should invite its member countries to revisit its mandate to meet its role in the world more effectively. The world we live in today is very different from the era of Bretton Woods, Purisima says.