Reform at the IMF
And a lesson for the United Nations

Saturday, September 2, 2006

FROM MEXICO to East Asia to Russia and Argentina, the years from 1995 to 2001 were marked by financial crises. The past half decade has been quiet, leaving the International Monetary Fund, the chief cop when trouble strikes, with nothing left to fret about except its own identity crisis. The IMF's leadership is responding by updating its structure and mission. The Bush administration, which has often acted clumsily in its dealings with multilateral institutions, has played a key role in supporting this rejuvenation.

The most concrete sign of progress came on Thursday, when the IMF's board agreed to allow China, South Korea, Turkey and Mexico to increase their financial support for the fund in exchange for a slightly larger voice in its policies and lending. This is the sort of reform that's needed at the U.N. Security Council, too: To be legitimate, multilateral institutions must reflect the global distribution of power as it is now, not as it was when these institutions were set up more than half a century ago. The IMF's board also declared an intention to increase the say of other countries whose economic weight has grown. Other countries will lose clout, though there will be special provisions to prevent Africa's small voice from becoming even smaller.

Meanwhile the IMF is rethinking how it can be useful. Most of its energy goes into analyzing the economic conditions of each member country. When those members are in crisis and need to borrow from the IMF, this is essential: The IMF needs to understand its clients to design the economic prescriptions that go along with its lending. But when a country is not in crisis, its finance minister is unlikely to believe that a team of visitors from Washington understands his economy better than he does. So the IMF needs to stake its claim to relevance by making the most of its international expertise. If a government is grappling with the design of its value-added tax, the IMF can play up its knowledge of VAT reform in other countries.

The IMF also aims to become a broker of solutions to cross-border financial problems. Currently, the world's trade and capital flows are unbalanced: The United States runs a huge trade deficit and depends on correspondingly huge infusions of foreign lending, while East Asia and the oil states have trade and capital surpluses. The annual Group of Eight summits are not the right place to defuse this time bomb, since big-surplus countries such as China and Saudi Arabia are not G-8 members, but the IMF is starting to convene meetings with the key players. The idea is to forge a common understanding of the policies that each country must pursue to unwind global imbalances without precipitating a crisis.

The IMF is not out of the woods: In the absence of crises it is lending less, which puts a strain on its budget. But the IMF is worth preserving, even if perhaps in a new form. The world has few competent global institutions that can help manage global problems, and it would be careless to lose one of them. The Bush administration, which took a confrontational line toward the IMF during its first term, is right to support pragmatic modernization now. Next it must extend this approach to reform of the United Nations.