Laggard: The IMF Is Offering 20th-Century Solutions for a 21st-Century Economy
Erian, Mohamed A. El-, Foreign Policy
AS THE WORLD'S power brokers--well, ministers and central bankers from 188 countries--gather in October for the annual meetings of the International Monetary Fund, they will again be confronted by evidence that the IMF is still in need of proper reform. This time, the evidence comes not only in the form of continued global economic malaise and financial instability, but the IMF'S brutally honest self-evaluation of its role in the insufficient Greek bailout (and, by implication, its involvement in other European countries). On the heels of this disappointing performance, one thing is clear: The IMF is still stuck in the last century.
Nearly 70 years ago, the IMF was created for what remains a good and valid reason. Emerging from a world war that had been fueled by a global depression, beggar-thy-neighbor policies, and inadequate economic coordination, visionary leaders recognized that a well-functioning global economy requires a strong, multilateral institution empowered to intervene and rescue countries from disaster.
On paper, the IMF is well-equipped for the job. It commands a virtually universal international membership. It has a highly talented staff and a sizable budget. Its Articles of Agreement give it unique and direct access to policymakers from individual countries. And its executive board provides a confidential forum for frank multilateral discussions and collective decisionmaking. But it is hamstrung by its masters in Europe over political squabbles and is not nearly representative of the shift south and east in global economic power.
It is far from obvious that sufficient steps will be taken to make the IMF more effective. Despite the obvious, urgent need, officials are still unwilling or unable to pursue the comprehensive revamp that is so critical to the global economy's well-being.
Five years after the financial crisis that ravaged Western and emerging countries and pushed the world to the edge of a depression, the global economy is struggling again. Growth is anemic, alarmingly high pockets of unemployment persist, and social unrest is on the rise from the Middle East to Europe to Latin America. To make things worse, economic disappointments are no longer limited to weaker countries. Whether it is flat growth in Germany, China's slowing economy, or less-positive news from recently booming economies such as Brazil and Turkey, even the strong are feeling the malaise.
Global finance is also increasingly vulnerable. Despite many new regulatory reforms to make the system stronger and safer, discomforting instability has returned to markets. Rather than base investment and resource-allocation decisions on sound, fundamental analysis, too many investors rely overwhelmingly on the artificial support they receive from the experimental policies pursued by Western central banks. No wonder the U.S. Federal Reserve's mere mention a few months ago that it might reduce its monthly securities purchases led to dizzying asset price drops, disrupted markets, and panic. These wild gyrations severely complicate policymaking around the world, adding to the headwinds facing growth and job creation.
Yet this is the type of world for which the IMF's founding fathers--particularly British economist John Maynard Keynes and his American counterpart, Harry White--created the institution. At minimum, the IMF was built to act as an effective, decisive crisis manager; more ambitiously, it was to serve as a global police force to prevent the emergence or persistence of large imbalances that could imperil the economic and financial well-being of countries including those behaving responsibly.
IN PRACTICE, HOWEVER, the IMF'S contribution to a more stable and prosperous global economy continues to be undermined by long-standing structural and governance deficits. Perhaps nowhere is this clearer today than in the courageous report that the IMF has prepared on its involvement and failures in the first Greek bailout. …