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Last Updated: Friday, 1 October, 2004, 10:04 GMT 11:04 UK
What the IMF boss needs to do
Analysis
Robert Chote
Director of the Institute of Fiscal Studies and a former IMF employee

Rodrigo de Rato
The new boss says the IMF is a political institution

This weekend representatives of the International Monetary Fund's 184 member countries gather in Washington for its annual meeting.

It is the debut for Rodrigo de Rato, the former Spanish finance minister appointed managing director of the global economic watchdog earlier this year.

Mr de Rato has yet to unveil a grand vision for the Fund, but has said he regards it as a "political" institution.

This raised eyebrows among those who portray it as purely technocratic, but he is absolutely right.

The Fund's critics sometimes forget that it is ultimately run and financed by its member governments, which is both a strength and a weakness.

The Fund was created 60 years ago to help countries resolve balance of payments problems without feeling the need to impose harmful trade barriers or squeeze the life out of their economies.

It was set up as a credit union, with members depositing part of their foreign exchange reserves to be leant for short periods to countries in difficulty.

The "quota" each country contributes - and its voting power - roughly reflects its importance in the world economy.

The member countries are then represented either singly or in constituencies on the Executive Board, which decides when to lend and with what strings attached.

Helping needy countries?

In the early days, virtually any member country could imagine itself needing the Fund's financial help, but the growth of private sector capital flows has now left it lending exclusively to developing countries.

The big-quota countries that call the shots know they are much less likely to have to submit themselves to its policy conditions than in earlier decades.

Some borrowers have found themselves in debt to the Fund and subject to its policy conditions over very long periods.

Meanwhile, these conditions have become more extensive and controversial domestically with the recognition that a country's ability to sustain strong growth and economic stability depends not just on budget deficits and the like, but also on structural features such as sound banks and flexible labour markets.

Mr de Rato needs to build a consensus to enhance the voice and representation of developing countries

Of course, the Fund's richer members have always been "more equal" than its poorer ones, but this polarisation into distinct groups of borrowers and creditors has helped undermine the notion of the Fund as an even-handed instrument of the international community.

It does not help that the most rapidly growing and successful developing economies in Asia do not feel they have the influence they deserve.

Protesters
IMF meetings regularly attract anti-globalisation protesters
Europe clings tenaciously to at least a third of the 24 seats on the board and by convention it gets to choose the managing director. The US in turn wields the biggest single vote and even greater informal influence.

Political motives

The way this power has been exercised has fuelled criticism that lending is driven by political motives rather than the needs and merits of the borrowers.

For example, the US recently insisted that the Fund continue to support Argentina even though IMF staff told the board that its government was failing to do what was necessary to put its economy back on an even keel.

There was only token opposition on the board.

Lending in support of weak policies is dangerous because of the nature of modern financial crises.

It is much more expensive to help a country cope with a sudden outflow of capital than a conventional balance of payments problem.

As a result the Fund's outstanding lending has become heavily concentrated on a few borrowers, notably Argentina, Brazil and Turkey.

With the Fund easy to blame for economic hardship, a big borrower may one day decide to default.

IMF headquarters in Washington
The Fund now lends almost exclusively to developing countries
If Argentina did so, the Fund could probably cope by charging other borrowers more and paying depositors less.

But if another followed, the Fund's financial structure might be hard to sustain and resources for future lending could be much harder to come by.

Dancing to the pipers' tune

It is a fact of life that international institutions dance to the tune of powerful countries more readily than weak ones.

But the powerful need to recognise that the effectiveness of these institutions depends on them being seen as legitimate.

This argues for increasing the influence of poorer and fast-growing economies, as well as ensuring that all member governments are held to account for the Fund's actions rather than allowing faceless bureaucrats to shoulder the protest and criticism.

On Thursday the Fund said that the board had been looking at ways to enhance the voice and representation of developing countries, but "the broad consensus among the shareholders needed to achieve this does not currently exist".

Mr de Rato should do what he can to build one.




SEE ALSO:
Finance ministers meeting in US
01 Oct 04 |  Business
World growth 'fastest since 1973'
29 Sep 04 |  Business


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