Crisis Comes to the IMF

Friday, October 19, 2007

"NEITHER A borrower nor a lender be," Shakespeare's Polonius advised Hamlet. By that standard, the 63-year-old International Monetary Fund should be in great shape. The IMF has only $11 billion in credits outstanding; it is sitting on $252 billion in usable resources. Just a decade ago, the fund, famous for its bailouts of troubled developing countries, was at the center of tumultuous financial events in Asia, Russia and Brazil. Those countries have recovered, paid back their emergency borrowings and gone on to pile up international reserves. There is no balance-of-payments crisis on the horizon.

So why is everyone, including the new IMF managing director, Dominique Strauss-Kahn of France, crying for reform? First, erstwhile recipients of IMF bailouts, the newly rich emerging economies, are demanding a role in IMF policymaking commensurate with their economic weight. Russian President Vladimir Putin has been calling for a "new architecture of international economic relations" and supported a rival candidate for managing director against Mr. Strauss-Kahn, who was essentially chosen by the European bloc on the IMF board. Meanwhile, Asian resentment at the way Western-led institutions handled the 1997-98 Asian financial crisis has given rise to the Chiang Mai Initiative, a 13-nation accord to pool resources for the next crunch. It has far more money available than the IMF could muster.

The IMF's second major challenge is that it might need a bailout soon itself. The fund is supposed to finance its $1 billion administrative budget only out of its earnings from lending. This was no problem back in 2004, when the IMF's net income was $1.2 billion. In fact, the fund hired hundreds of new staff members and built a new headquarters. But with borrowers now paying their loans back ahead of schedule, the IMF is hemorrhaging cash. A panel of experts appointed by the fund suggested earlier this year that the IMF sell some of its gold reserves, but a better idea would be for the organization to follow its own advice to deficit-ridden countries: Cut costs. Efforts so far have been modest. Downsizing is "on the table," Mr. Strauss-Kahn said Oct. 1. But he gave few specifics.

The fund's twin crises of legitimacy and financing need to be tackled simultaneously. Born in an age of fixed exchange rates and limited international capital flows, the IMF must adapt to a new world of floating currencies and massive cross-border trade and investment. Mr. Strauss-Kahn declared that "we need more IMF" -- not true, if he means more mission creep into areas, such as poverty reduction, that are already the province of the World Bank. But he is right to suggest that the world needs more of the public good -- financial stability -- which the fund, with its expertise, information-gathering capability and reputation for objectivity, is well positioned to facilitate. It can set standards for governmental financial disclosure and spread the word about pending risks to international capital flows. Some firefighters use downtime to teach fire safety. The fund could do the same, even as it remains trained and equipped for the next crisis.

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