More power for the powerful?

IMF wins mandate for ‘multilateral surveillance’

 

The news that the IMF has been given the remit to extend its powers from its present bilateral surveillance of individual country economies to a ‘multilateral surveillance’ of the global economy as a whole, is unlikely to be welcomed by anyone hoping for progress towards more democratic and effective world governance.

 

The move is explicitly designed to broaden the scope and influence of the Fund, and rectify the ever widening trade imbalance between the United States and the Asian economies.  In the words of the UK Chancellor Gordon Brown, Chair of the Fund’s International Monetary and Financial Committee (IFMC), ‘In future the IMF should be more able to address global questions with multilateral surveillance, like current account imbalances, the impact of oil prices and financial sector questions, and monitoring in future more deeply not just country policies but the linkages and spillover effects of one country’s policies on others in the global economy.’

 

‘Specifically’, he added, ‘we agreed that the IMF must ‘focus more on crisis prevention, as well as crisis resolution, that multilateral as well as bilateral surveillance would become of increasing and central importance, and that we would agree an annual surveillance remit built on multilateral and bilateral surveillance of monetary, fiscal, exchange rate policy frameworks and financial sector issues’.[1]

 

In view of the fact that the Fund’s voting structure is heavily skewed in favour of the world’s rich countries, it is hardly surprising that this resolution delighted the G7 representatives, and especially the US, whose record trade deficit continues to widen, especially in relation to China. (It should be remembered that developed countries, which have just 14 per cent of the world's population and are not directly affected by its programmes, hold more than 60 per cent of the votes in the IMF, and the Western European governments collectively appoint the Fund’s Managing Director[2].)  

 

Within this structure, moreover, the United States holds a 17 per cent stake, giving it de facto veto over major Fund decisions, since these require agreement by nations representing at least 85 per cent of all voting shares. Accordingly, although the IMF has been remonstrating with the US about the size of its deficit for some time, these criticisms have effectively been ignored.

 

The resolution to put forward proposals at the September meeting in Singapore to ‘increase the voting power for some countries, including a number of emerging market economies’, will unfortunately not affect the power of the US veto. Nor will it redress the existing imbalance of power in favour of the poorer countries of the world. At best, the suggested redistribution of quotas will increase the voting share of some of the richer developing countries, for example, China, North Korea, Mexico and Turkey. Under these circumstances, it is clearly impossible for the Fund to play an objective and impartial ‘multilateral surveillance’ role in the global arena.

 

Nor is it likely that its new remit will resolve the long battle being played out between China and the US over the revaluation of the renminbi in a manner that will prove more beneficial to the world’s poorest countries. The IMF long ago recommended that China revalue much faster in order to redress ‘global imbalances’, but China has consistently ignored this advice, and despite the Fund’s new powers, the country’s exchange rate policy will doubtless continue to evolve at its own pace.

 

Rather, if the Fund’s role is to change, its attention should be refocused on areas that are of direct concern to developing countries, such as reducing the volatility of financial flows, and diminishing the vulnerability of emerging markets to capital flight and tax competition.

 

At the moment, it is increasingly difficult to understand why any country in the developing world should listen to the IMF at all. In the first place, its policies appear to have no inherent consistency in their approach to the issue of ‘global imbalance’. Although its original purpose was to keep global surpluses and deficits in equilibrium through a system of fixed exchange rates and the restriction of capital movements between countries, the Fund’s policies are instead self-evidently dictated by the interests of its rich shareholders.

 

Thus, in the 1980s and 1990s, its programmes were designed to effect a reduction in developing country deficits – whereas now, when the situation is reversed, its advice has become focused on persuading the same countries to reduce their surpluses, which have become a grave embarrassment to the wealthiest nations of the world, while the US shrugs off the muted criticism of its massive deficits. This double-standard cannot help but be glaringly apparent to the recipients of the Fund’s economic directives.

 

Secondly, the IMF has no powers of compulsion, and the leverage it exercised in the past depended on its role as creditor and gatekeeper to the loans process, and also on its reputation for ‘good judgement’ in the commercial markets. Deeply indebted countries have been in no position to ignore the Fund’s advice, or refuse to implement its various conditionalities, and in the case of middle income countries, the confidence of the financial markets has typically been lost when the Fund has condemned their economic policies, often leading to financial meltdown. 

 

This situation, however, is changing fast. The IMF’s record – especially regarding the handling of the contagious emerging market crises of the 1990s – is now widely recognised as abysmal, and the effect of its structural adjustment programmes on the developing world as little short of disastrous. As a result many of its largest borrowers have either paid off their loans early, or are threatening to do so. This has done more than leave the Fund seriously short of income; it has left it seriously short of authority.  And without either authority or the legitimacy which would come from genuinely representing the interests of its membership as a whole, it is hard to see why the recommendations arising from its ‘multilateral surveillance’ should be obeyed by the developing world.