Bangkok Post

The IMF doesn’t need to be more democratic

- TYLER COWEN Tyler Cowen is a Bloomberg Opinion columnist. He is a professor of economics at George Mason University and writes for the blog Marginal Revolution. His books include ‘Big Business: A Love Letter to an American Anti-Hero’.

This is “IMF week”, when diplomats, board members, economists and many others connected to the Internatio­nal Monetary Fund gather to discuss business. On top of that, controvers­y has surrounded the fund’s top official, Kristalina Georgieva, over her earlier role in overseeing the World Bank’s Doing Business index. And so questions are being raised anew about the mission of the fund, its reliabilit­y and whether it should always be led by a European, as has been the custom.

Don’t we need to somehow reform the IMF? Shouldn’t the fund be led by “the best person”, regardless of national origin? Should it somehow be more democratic?

My answer, in a nutshell, is “not really”. We would do better to realise that the IMF intrinsica­lly is a stodgy and indeed somewhat cronyist institutio­n, and it has to be so.

The IMF was created by the Bretton Woods agreement, fashioned by the US and the UK, and it was designed to impose a Western and indeed Anglo hegemonic financial and currency order on the world. These days, the original Group of Five nations (the US, Germany, the UK, France and Japan) exercise dominant influence through their voting quotas. China has much more sway than it used to, but it still can’t override a G-5 consensus.

The IMF is used by the G-5 nations and their allies to put their reputation­al capital behind the internatio­nal monetary order. Obviously, the backing countries are only going to underwrite

a system that they largely approve of and benefit from.

If the IMF didn’t exist, failed nations still periodical­ly would be bailed out by rich ones, if only because the G-5 politician­s wouldn’t wish to endanger the stability of the global financial order. But problems would arise as the bailouts would have to be organised anew each time. Which nation would put in how much? Who would pull the plug on failing nations and when? Who or what would enforce repayment? All those questions are regularize­d and institutio­nalised through the existence of the IMF.

The cronyist element is that the G-5 nations use the IMF and its lending facilities to protect the creditwort­hiness of their own banks and financial systems. In contrast, an IMF serving “the citizens of the world”, whatever that might mean, would be an IMF without much support from the biggest and most important financial

players. It would be more like the undercapit­alised Unicef than an institutio­n that can move world markets or help preserve them.

Nor will it work for China to have too much influence over the IMF, as China isn’t aiming to build up a global order of relatively free trade and free capital movements. The Chinese know this, and they have been creating their own lending projects and investment­s, such as the giant Belt and Road Initiative and the Asian Infrastruc­ture Investment Bank.

It thus should come as no surprise that the Europeans nominate a managing director for the IMF and the US in essence chooses the president of the World Bank, by longstandi­ng mutual agreement. Establishm­ent figures are installed to ensure that the IMF and World Bank continue to support the prevailing internatio­nal economic order. These aren’t institutio­ns for radicals or dissidents.

If the directorsh­ip and board governance of the IMF were picked by a vote from all 190 member countries, the leading G-5 nations would put much less of their reputation­al capital behind the institutio­n. The IMF is an internatio­nal public good, but such public goods only get produced when it is in somebody’s selfish interest to do so.

Critics from the left, such as economist Joseph Stiglitz, have argued the IMF has imposed too much austerity on debtor nations and insisted on too many interest rate increases at the wrong times. Those criticisms might hold some truth, but there aren’t many feasible alternativ­es. The IMF does try to enforce debt repayment and the orderly resolution of claims, and that limits the kind of advice, and also the arm-twisting, that it can provide. If the institutio­n somehow became a mechanism for debt jubilee, the end result would be a diminution of private capital flows to poorer nations. Why lend if no one will work to see that you are paid back? The IMF would lose credibilit­y as well, and that would limit its ability to fight global financial crises.

Successful internatio­nal economic orders typically have been based on a fair degree of hegemony, whether it was the British-led gold standard of the 19th century, or the more recent post-World War II American dominance. Once you realise that, a lot of the current questions about the IMF answer themselves rather automatica­lly. The real issue isn’t how to improve the IMF, but how we are going to cope as current hegemonies continue to lose their sway.

 ?? AFP ?? Activists dressed as ‘debt collectors’ hold cutouts of the leaders of Italy, the UK, the US, Australia, and Canada during a protest at the IMF headquarte­rs in Washington DC this week.
AFP Activists dressed as ‘debt collectors’ hold cutouts of the leaders of Italy, the UK, the US, Australia, and Canada during a protest at the IMF headquarte­rs in Washington DC this week.

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