Overcoming fragmenting geopolitics
IMF will remain essential public good
by Mark Sobel in Washington
Fri 28 Sep 2018
Despite the International Monetary Fund's largely successful quest to modernise and remain relevant, it faces potentially existential challenges. These come foremost from a fragmenting geopolitical order amid a growing dispersion of global economic weight and power.
The US placed the IMF at the centre of its postwar vision of an open and multilateral global financial system. Though not without criticism, the Fund has always received bipartisan backing from internationalist-minded Republican and Democrat administrations alike. Even with its global weight diminishing, the US remains the elephant in the room. President Donald Trump's administration has made known its aversion to international financial institutions. The Fund has so far been backed by the US in its foray into Argentina, but in the longer term it cannot count on the mercurial Trump.
Europe is increasingly inward-looking, seized by rising nationalism and populism. Frayed feelings over Greece have singed the IMF's relationship with the European Commission and European Central Bank. Two decades ago the international community reacted adversely to the thought of an Asian Monetary Fund undermining the global order. Today, international policy-makers are cheering plans for developing further the European Stability Mechanism into an institution independent of the IMF – and has said little about plans for a European Monetary Fund exercising its own conditionality.
Asia, in the wake of its 1998 crisis, drew the correct lesson on strengthening economic fundamentals. It also began accruing large reserves, often through mercantilist policies, to avoid returning to the Fund. The Chiang Mai initiative accords an important role to IMF conditionality. But many see Chinese lending through the Belt and Road infrastructure programme as an alternative to the IMF.
The Fund is caught between the forces of fragmentation. To make regionalism work to support and not oppose the IMF, the Fund has sought to develop common principles for regional financing arrangements, which respect the central role of the Fund as a global financial safety net. But the principles are general, Europe may be going its own way, and regional financing arrangements are too diverse to fall under one umbrella.
The Fund is putting the debate about resources back on the table. It would like a big increase, especially in case its borrowed resources roll off. This is emerging at a time when major shareholders are inclined to do little, if anything.
The IMF has little room for manoeuvre. The Trump administration is averse to international bodies generally and the Fund in particular. Securing supporting legislation for the IMF would be difficult. Any action would need to bolster China's share in the organisation. Europe knows it is overrepresented in the Fund and any action on quotas will diminish its voting power – better to blame the US for inaction and perhaps offer to roll over bilateral loans to show goodwill. However, if nothing happens, China and other emerging markets may feel alienated from the Fund and drift toward regionalism.
Debt distress is quickly rising in Africa and elsewhere, fuelled by opaque loans from 'non-traditional creditors', Fund-speak for Beijing and the Belt and Road. China has shown little interest in joining established multilateral mechanisms to coordinate forces on bilateral debts, let alone write them down if needed as the major advanced economies have done for years. Debt sustainability may soon necessitate official Chinese write-downs. The final stage of another round of 'lend and forgive' is nigh.
Long-standing internal dilemmas bedevil the Fund. The IMF is far more potent as a crisis responder than a crisis preventer. Many of its procedures are better suited for a world of current account crises. But since the 1994 Mexico crisis, capital account woes have been the most potent area of difficulty, requiring exceptional access to resources. The Fund is a short-term macroeconomic lender. But structural reforms are often critical for success, especially when countries carry out internal devaluations, and such reforms require longer horizons to take hold. Fund lending has shifted from the traditional workhorse standby to extended arrangements with longer maturities.
This raises very important questions. Is the Fund striking the right balance between short- and longer-term lending? Are its conditions for macroeconomic conditionality and structural reforms sufficiently streamlined and acceptable to recipient countries? In supplying large-scale support (as it did with the European crisis countries), is it acting as a catalyst for further lending from the private sector or in some ways providing a reason why that lending does not take place?
US Army General Douglas MacArthur said, 'Old soldiers never die; they just fade away.' Approaching its 75th anniversary, the IMF is a spry and mature organisation, not yet at risk of fading away. The Fund's expert staff, surveillance and technical assistance are important public goods, as is its machinery for international financial co-operation. Financial crises will remain endemic. In those moments, even the most reluctant shareholders will turn to the Fund to be the first respondent. Out of self-interest they will ensure that the IMF has the resources to do its job. The need for international monetary co-operation will be greater than ever.
Mark Sobel is US Chairman of OMFIF. This is the last in a series of three articles on the International Monetary Fund since the 1997-98 Asian financial crisis. The fist was published on Wednesday 26 September, and the second on Thursday 27 September.
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