IMF Offers New Tools For Global Downturn

Countries Could Get More Money, Faster

The International Monetary Fund, under increasing pressure to reinvent itself, yesterday rolled out reforms that it said would make it more effective in combating the global economic crisis.

World leaders will turn their attention to the role of the IMF when they meet next week in London for the G20 summit of industrialized and developing nations, and they are expected to reiterate support for increasing the IMF's resources, though there are differences on how much those resources should be increased.

The reforms offer the clearest picture to date of what the IMF would do with more resources. World leaders as well as IMF officials have been clamoring for additional funds for the organization as the scope of the economic crisis has grown. Since last fall, it has doled out more than $40 billion in aid and has access to about $300 billion. The European Union has pledged to kick in another $100 billion.

The centerpiece of the reforms is a new line of credit that gives countries with well-managed economies the ability to borrow more money, faster and with no strings attached. The fund also doubles limits on the amount of money countries may receive through some of its other programs. The IMF wants to encourage more countries to seek its help as a precautionary measure rather than waiting until they're in acute distress.

The new programs may help countries in Eastern Europe that have been hit hard by the global downturn. Many countries in the region are suffering as demand for exports plunges and foreign investors retreat. The problems threaten the stability of the European banking system as a whole because banks in Western Europe lent heavily to consumers and businesses to the east.

At the G20 summit, finance officials are hoping to forge a consensus over how much more money the fund needs. IMF and European Union officials say its resources should be expanded to $500 billion, while U.S. officials contend it needs more.

The success of the IMF's revamped approach depends on whether countries will participate. South Korea and Singapore have so far shunned IMF money because they did not like how the IMF handled the Asian financial crisis. Many countries in Latin America have also shunned IMF assistance because of past experiences with the organization.

"It's not that the IMF instruments are no good," said Liliana Rojas-Suarez, a senior fellow at the Center for Global Development. But public perception of the IMF as a tool of U.S. policy ensures that "Latin American countries are not going there."

Even as the 65-year-old body is being asked to refashion itself to help solve the problems of a new financial era, China this week proposed yet another task for the IMF -- managing a new global reserve currency that would replace the U.S. dollar.

The idea reflects growing Chinese unease over the impact of U.S. policies on its vast holdings of Treasury bills and other U.S. government debt. Joaquín Almunia, the European Union official in charge of economic affairs, dismissed the idea. Last night, President Obama said, "I don't believe that there's a need for a global currency."

The IMF has repositioned itself periodically since its creation after World War II to oversee the exchange rate system established under the Bretton Woods agreements. That role ended in the 1970s, and in the 1980s, it emerged as the manager of the Latin American debt crisis. In the 1990s, the fund stepped in to deal with the Mexican and East Asian financial crises. In the past decade, a dearth of crises left it with little to do.

IMF officials said the changes announced yesterday are a response to long-standing criticism that the organization imposes conditions on developing nations that are too harsh and even harmful to their economies. The flexible credit line replaces a credit line created last fall that had no takers because countries said it offered too little money and terms that were too inflexible.

The changes also attempt to erase the stigma of weakness associated with taking IMF money that has kept many nations from asking for help until they are in dire straits.

Analysts saw the reforms as significant but incremental.

"You don't make it new overnight by changing some of the rules of the game unless you completely overhaul rules of the game, which this is not," said Carmen M. Reinhart, a former IMF official who is now an economics professor at the University of Maryland.

Mark Weisbrot of the Center for Economic and Policy Research, a left-leaning think tank, said the IMF hasn't gone far enough in scaling back policy prescriptions it imposes on borrowers and that poorer countries and those that do not prequalify for the flexible credit line still face harsh conditions.

"It is worth noting that nobody wants to borrow from the IMF even with 'lighter' conditionality," he said. "Everyone who can avoid the IMF is doing so. This shows how governments are voting with their feet -- they still don't want the IMF involved in their economic decision-making."

Others said the IMF missed an opportunity to assist well-run countries hurt by the downturn while making it easier for countries with bad economic policies to borrow money.