Page last updated at 20:07 GMT, Thursday, 9 October 2008 21:07 UK

Time to reform the IMF?

By Katie Hunt
Business reporter, BBC News

International Monetary Found (IMF) chairman Dominique Strauss-Kahn speaks to the press
The IMF is facing questions about its response to the global financial crisis.

The global financial crisis has cast fresh doubt on the International Monetary Fund's effectiveness in monitoring the world economy.

Charged with overseeing the global financial system and the economic policies of its 185 members, the IMF is supposed to act as an early warning system for markets.

But its failure to correctly diagnose the world's financial health this time around has sparked criticism that, not only is it not up to the task, but it treats rich and poor nations differently.

As delegates flock to its annual meetings in Washington this weekend, its critics say the time is right for reform.

'Flip-flopping'

Critics don't have to look far to find evidence of the IMF's 'flip-flops' on the economy.

The US is finding that there is not enough tools in the tool box to address the crisis and the IMF might have been part of that tool box if it had been reformed
Ngaire Woods, Oxford University

In April 2007, it gave an upbeat assessment for the world economy and when the sub-prime crisis first hit headlines in August, it said that the credit risk was "manageable".

But by April 2008, the IMF was predicting a massive $1 trillion (579bn) in losses from the sub-prime crisis.

It then decided to raise its world growth forecast in July. Its latest financial stability report released this week warned of a "severe downturn".

The IMF has also not been involved in what co-ordinated action has taken place to calm rocky financial markets.

"On the current issues...the IMF could hardly be described as being at the centre of discussions," says Mike Mussa, a senior fellow at the Peterson Institute for International Economics in Washington and a former IMF chief economist.

Caught unawares

In its defence - and as the IMF itself has said - the IMF is not alone in being taken by surprise by the depth of the crisis, Mr Mussa said.

The Bank for International Settlements, which groups the world's central banks, and the Paris-based Organisation for Economic Cooperation and Development did not fully realise the gravity of the situation either.

"The explosion of the crisis, particularly in the past few weeks, is something that was not anticipated by anyone in official circles," Mr Mussa says.

IMF members also discuss reports prior to publication, a fact which may delay publication and date the analysis.

Double standards?

The crisis has also reignited criticism that the IMF treats rich and poor countries differently.

The director of the International Monetary Fund (IMF) Dominique Strauss-Kahn (L) walks with Saudi Finance Minister Ibrahim al-Assaf
The IMF is trying to reform itself to better represent emerging economies.

During the Asian financial crisis in 1997 and 1998, the IMF opposed moves by Asian governments to use taxpayers' money to bail out ailing financial institutions.

In Indonesia and South Korea, this led to bankruptcies and widespread job losses and this, along with the onerous conditions attached to its loans, damaged the IMF's credibility in the region.

By contrast, IMF head Dominique Strauss-Kahn gave his approval to the US $700bn bank bail-out package even before US Congress had amended and approved the deal.

"There's definitely some truth and validity in these charges...of different standards," says Peter Chowla, policy officer at the Bretton Woods Project, an NGO that monitors the IMF and the World Bank.

"But it's also true that this crisis is different because we are talking about financial institutions whose activities span the globe."

"Korean and Indonesian financial institutions were not quite as systemically important."

There have been efforts to give greater representation to emerging economies. But the fact that the US and Europe are the IMF's biggest shareholders has made emerging giants like China distrustful of the organisation.

Box of tricks

In theory, the IMF should be at the forefront of the discussions on ways to handle the financial crisis, says Ngaire Woods, director of Oxford University's Programme for Global Economic Governance

Protesters demonstrating against the World Bank and International Monetary Fund (2000)
The IMF has faced anti-globalisation protests in the past.

It is one of the few global institutions that groups developed countries with powerful emerging economies in the Middle East and Asia.

These countries are sitting on large stockpiles of dollar reserves and their dollars could keep "world economy afloat", she says.

"The US is finding that there is not enough tools in the tool box to address the crisis and the IMF might have been part of that tool box if it had been reformed following the Asian financial crisis," Ms Woods says.

Headed for reform?

The IMF has faced criticism and calls for reform before, not least at the time of the Asian financial crisis in the late 1990s.

Prime Minister Gordon Brown and Chancellor Alistair Darling have long called for the IMF to be restructured and strengthened to enable it to fulfil its role as an early warning system for financial stability.

Ms Woods is hopeful that the crisis engulfing the world economy will act as catalyst for this reform - but this comes with a heavy dose of caution.

"You need instant, quite dramatic governance reform - and maybe that's where the crisis will take us sooner or later."




SEE ALSO
'Major global downturn' says IMF
08 Oct 08 |  Business
IMF in 'severe downturn' warning
07 Oct 08 |  Business
Profile: IMF and World Bank
18 Sep 08 |  Country profiles
IMF raises world economic targets
17 Jul 08 |  Business
IMF slashes world growth forecast
09 Apr 08 |  Business
Credit crunch costs '$1 trillion'
08 Apr 08 |  Business
Emerging economies eye IMF power
23 Oct 07 |  Business

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