There is a lot of talk these days about the need to expand the role of the International Monetary Fund so that this multilateral body can alleviate somewhat the misery wreaked by the financial tsunami that is currently sweeping the globe. What has been conveniently forgotten is that the Fund has been rather inept in anticipating the crisis and that the neo-liberal economic ideology it has blindly espoused has been responsible to a considerable extent for the present mess.
Many had predicted the meltdown, especially since the sub-prime housing loans market in the United States started collapsing in August 2007. But not the battalions of so-called economic experts in the IMF who bring out a bulky report called the World Economic Outlook twice a year. In April, the report stated that the US economy would grow by 0.5 per cent in 2008 and by 0.6 per cent in 2009. Fast-forward to October 8. The same report stated that the American economy would expand by 1.6 per cent this year and by 0.1 per cent next year.
Wait! That’s not the end of the story. The IMF took less than a month to downgrade this guesstimate as well. On November 7, the Fund’s pundits suddenly realised that the economic crisis was deeper and wider than what they had presumed a few weeks earlier: they now claim that the US economy would shrink by 0.7 per cent in 2009. Perhaps never before has this venerable body headquartered in Washington DC (where else?) been so wide off the mark. Why, indeed, is the Fund failing to read the writing on the wall? Is it in a state of denial?
The IMF was set up in 1946 after World War II in the wake of the famous Bretton Woods conference. The Fund was established ostensibly to foster global economic stability and help countries facing balance of payments crises. For decades, the IMF’s bosses were looked at with awe, if not fear and trepidation, especially in developing countries. Economists of the IMF would ‘dictate’ policies that would be unpalatable to governments of Third World countries and impose stiff ‘conditionalities’ on countries that sought loans from the Fund, begging bowl in hand.
Those years have thankfully passed by, unmissed. The Fund is today a pale shadow of its once-awesome self. On April 28, the IMF approved an increase in the voting rights of all developing countries put together from 31.17 per cent to 34.49 per cent. Consequently, the share of the affluent countries in the aggregate voting rights of the IMF came down from 60.57 per cent to 57.93 per cent. It was a pathetically small step forward for an institution that had stubbornly resisted change for over six decades.
Earlier, in September 2006, after two years of negotiations, the Fund had approved an ‘ad hoc’ increase in the voting shares of four countries: China, South Korea, Mexico and Turkey. At that time, India, Brazil, Argentina and Egypt had opposed the move on the ground that the IMF’s quota calculation formula was “opaque and flawed”. The finance ministers of the four countries had stated that the “disturbing picture that emerges is that some developing countries will be given increases by reducing the shares of some other equally deserving countries”.
It is hardly a secret that the IMF functions in a manner that is biased towards the rich. Out of the Funds’s 184-member countries, seven — the US, Japan, Germany, Britain, France, Canada and Italy — dominate its functioning. Any major decision by the IMF requires 85 per cent voting support which means that one country, the US, has veto power since its voting power is 17 per cent.
The total vote share of the 80 poorest members of the IMF is just about 10 per cent while five rich countries — the US, Britain, Germany, France and Japan —together control around 39 per cent of the total vote and have permanent seats on the Fund’s governing board. The managing director of the Fund is invariably European (just as the World Bank has been headed by an American).
After the Asian financial crisis of the late-1990s, developing countries became rather wary of blindly following the Fund’s policy prescriptions. A stark manifestation of the changed global reality is that the IMF is no longer a net lender of funds; it is, in fact, a net recipient. In 2003, the IMF had loaned more than $100 billion to various countries. This figure has shrunk to less than $20 billion a year. The IMF is today a net receiver of funds, much of it in the form of repayments of past loans by developing countries. What a fall?
Pakistan, Iceland and Hungary have reportedly sought IMF assistance after many years. But that is hardly a reason to increase the importance of the Fund in resolving the present economic crisis without drastically reinventing it. Will Manmohan Singh have the gumption to argue that the IMF should henceforth be headed only by a representative of the developing world?
Paranjoy Guha Thakurta is an independent educator and journalist.