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The new face of the IMF
The G20 summit in London in April resolved to increase the IMF’s funds from less than $ 100 billion to over $ 850 billions. To this end, the industrial nations and, for the first time, China and Brazil are lending a small share of their foreign-exchange reserves to the Fund. On top of that, the special drawing rights (the IMF’s internal unit of accounting) of all 186 IMF members were increased. Furthermore, the IMF is selling some of its gold, in order to be able to grant loans of up to $ 17 billion dollars at favourable interest rates to the poorest nations through to 2014.
The G20 hopes the IMF will manage to contain the worst effects of the financial crisis with these huge sums. In any case, the Fund’s significance for the poorest nations has grown. It has announced that it will make a total of $ 8 billion available to them over the next two years on favourable terms. In the past three years, the annual amount had been a mere $ 1 billion. Moreover, the IMF has forgone interest payments of some 60 low-income countries on concessional loans until the end of 2011.
A significant amount of the additional funding and the Flexible Credit Line are not or only to a limited extend tied to policy conditionality. This stance is in line with members’ wish for as much liquidity and as few conditions as possible. At the peak of crisis, this approach was certainly correct. The fast supply of liquidity helped to avoid dramatic financial squeezes in emerging economies and developing countries.
In the crisis, the IMF has thus revised its orthodoxy. With French socialist Dominique Strauss-Kahn at its helm, the IMF did not only permit developing countries to follow the anti-cyclical budgetary and monetary policies currently practised by industrial nations, it even recommended them to some African governments. By contrast, in the Asian Crisis of the 1990s, the IMF had aggravated the downturn by initially insisting on austerity.
In the medium-term, however, the IMF will certainly link loans to policy conditions again. It remains to be seen what those conditions will be and whether developing countries accept them. Both will depend on progress in the long-lasting debate over IMF reform. At the end of September, the G20’s Pittsburgh summit announced that the voting power of emerging economies and developing countries would be increased by five per cent. This step is not big, but it does result in approximate voting-power parity between industrial and developing countries.
Moreover, the G20 gave the IMF the mandate to arbiter over the economic policies of individual nations. Beyond loan conditionality, however, the Fund has no means of sanction. The IMF was already assigned a similar role in 2006, but was unable to fulfil it because major actors such as the USA, Europe, China and Japan did not cooperate. The future will tell whether their attitude will really change. In any case, the IMF must now assess without fear or favour what impact the policies of individual countries, including the most powerful ones, have on the international community. It must make recommendations accordingly.
The emerging economies countries matter too, of course. Since the Asian crisis at the latest, many of them have been hoarding forex reserves in order to protect themselves from the negative effects of volatile global capital flows. It is open whether they will really accept the IMF as their insurance in cases of emergency. The Asian-crisis trauma runs deep.
Two issues will probably be decisive for the long-term acceptance of the IMF. First, the next IMF head must come from Asia. Second the Fund must back away even more from its orthodoxy on free capital markets in order to soften the concerns of emerging economies and developing countries. In the long run, that will require a new global monetary system.