[stop-imf] Tired IMF struggles to reinvent itself

[robert weissman]

USA TODAY

*April* 19, 2006 Wednesday
FINAL EDITION

Tired fund struggles to reinvent itself;
Goal: Regain once-clear focus, energy

*BYLINE:* David J. *Lynch

*WASHINGTON -- In country after country, the pattern is always the same:
Get into desperate economic trouble and, after all else fails, call on
the deep pockets of the International Monetary Fund for help.

Since the mid-1990s, the IMF has led multibillion-dollar bailouts of at
least nine economies, including Thailand, Russia and Argentina.

Now, it's the IMF that is in trouble.

The problem is partly financial. In each of the next three years, the
IMF expects to run budget deficits with a peak of $297 million in fiscal
2009. It's the first time since the 1970s that the fund has operated in
the red.

But the IMF's woes are more fundamental. An institution born amid the
ashes of World War II is visibly struggling to find its footing in the
midst of increasing globalization. Critics, including the U.S. Treasury
Department and central banks in England and Canada, complain that the
fund is not adapting quickly enough.

"The IMF faces an identity crisis. It's lost its way as a multilateral
institution," says Edwin Truman, a former Federal Reserve Board and
Treasury official who has written a major study of the IMF.

Financial specialists, both inside and outside the fund's limestone
walls, now are evaluating reforms proposed by IMF Managing Director
Rodrigo de Rato entailing the broadest changes in mission and
organization in at least a generation. The proposals will be discussed
this weekend in Washington at the spring meeting of the IMF and its
sister institution, the World Bank. But final decisions on a
comprehensive overhaul aren't likely until a subsequent gathering this
fall in Singapore.

Critics say that the IMF, created to maintain a healthy global monetary
system, is overly cautious about tackling the massive financial
imbalances that threaten today's world economy. That, saddled with an
unwieldy management structure, the IMF's internal decision-making
process also shortchanges Asia's new economic powers. And that its
lending to poor countries too often duplicates the development mission
of the World Bank.

"The fund has been too soft-spoken for too long on all major issues. ...
The momentum (for change) is building," says Barry Eichengreen, an
economy expert at the University of California, Berkeley.

In an hour-long interview with financial journalists Tuesday, de Rato,
57, the former Spanish finance minister who became the fund's managing
director almost two years ago, rejected much of the criticism as
"exaggerated." Those who complain the fund should do more to force China
to revalue its currency, for example, ignore the fact that the IMF lacks
the power to compel a country to do anything. It can't even hold a press
conference at the conclusion of its annual consultations with individual
countries unless the affected government approves.

De Rato is pinning his hopes for re-energizing the fund on his newly
minted "medium-term strategy," which will be discussed this weekend. He
is also convening a one-day conference Friday on the financial
distortions in the world economy: U.S. indebtedness, excessive savings
in Asia, and Europe's need for structural reform. He insists the fund
can be retooled for the 21st century. "The fund is facing a changing
world like everybody else. ... The institution is very aware of what are
the challenges," he said.

The ties that bind

The embattled fund's current angst is a far cry from the clarity of its
origins. Representatives of 45 nations gathered at the Mount Washington
Hotel in Bretton Woods, N.H., in July 1944 to design an international
monetary system for the postwar world. Beginning their talks less than
one month after Allied soldiers stormed ashore at Normandy, the
delegates sought to avoid the errors that had worsened the Great
Depression and fueled the descent into World War II.

In the 1930s, major nations employed their exchange rates as commercial
weapons -- devaluing their currencies to gain trading advantages in a
manner that ultimately cost them all dearly.

Led by British economist John Maynard Keynes and Harry Dexter White, a
U.S. Treasury official, delegates created the IMF to promote world trade
and financial stability through a system of fixed exchange rates. Acting
as a sort of last-chance credit union, the fund also would provide
short-term loans to countries suffering temporary payment problems.

Over the intervening six decades, the IMF developed into one of the
world's premier repositories of economics talent. Today, its staff of
2,680 draws some of the top economists from around the world. Generous
tax-free compensation helps attract them: entry-level economists earn up
to $117,810, while department directors bring home up to $281,330 --
more than the chairman of the Federal Reserve Board.

Yet, the IMF has struggled to keep pace with the changing global
economy. By the mid-1970s, the system of fixed exchange rates had
collapsed as the markets forced industrial economies, including the
United States, to allow their currencies to float.

Private markets, rather than IMF credits, became the major source of
capital for industrialized countries. As late as 1975, almost half of
IMF loans went to developed nations, according to Raghuram Rajan, IMF
economic counselor. By the late 1980s, none did.

Freed of the need for IMF cash, developed countries established an
ever-lengthening list of multilateral groups, such as the G-8, for
high-level discussions. That trend undermined the IMF's status as the
chief coordinator of global monetary decisions.

At the same time, controls on private capital flows were progressively
eliminated, knitting economies together more closely than ever.
Globalization led to more efficient use of capital, but it also meant
that developments in one country could ricochet through world markets
with startling speed. In 1983, the overseas assets and liabilities of
industrial countries were equal to 70% of their gross domestic products.
In 2003, the figure was 250%, according to IMF figures.

The fund's handling of the contagious emerging markets crises that
erupted in the mid-1990s subjected it to fierce criticism. Often
supported by the U.S. Treasury, the IMF provided large emergency loan
packages to several countries that had tried (and failed) to maintain
fixed exchange rates in the face of furious capital flows.

The rescues, however, came with numerous strings attached. To qualify
for bailouts, countries were required to raise interest rates, slash
government budgets and sell state businesses.

Bailouts led to backlashes

The fund's free market prescription plunged millions of people in
countries such as Indonesia, Russia and Argentina into poverty and
ignited public furor at what were seen as neo-colonialist policies. In
recent years, thousands of protestors have targeted the IMF's annual
meetings in Washington.

Continued resentment of the IMF affects the global economy today.
Instead of buying more products from the USA and other industrial
nations, developing countries in Asia are piling up enormous foreign
exchange reserves as a financial cushion in case another crisis hits. At
the end of last year, Asian reserves totaled nearly $1.9 trillion, vs.
$497 billion at the end of 1997, according to the Asian Development Bank.

In 2000, 13 Asian countries -- including China, Japan and South Korea --
launched the Chiang Mai Initiative, a first step toward a regional
monetary fund that could supplant the IMF. "Asian countries affected by
the crisis believe the conditionality applied by the IMF aggravated the
problem a great deal. ... Basically, they have created a firewall. They
will not go to the IMF for anything," says Ifzal Ali, chief economist of
the Asian Development Bank in Manila.

The fund recognizes it needs to address Asian grievances. De Rato has
drawn up preliminary plans for revamping the institution's governance to
give important economies such as China and India a greater say.

But the antipathy toward the fund isn't limited to Asia. In Latin
America, Argentina and Brazil have paid off IMF loans early in a bid to
be free of the fund's strictures. Together with a healthy world economy,
that trend has reduced the need for the IMF's services. Since 2003, the
IMF's total loans outstanding have plunged from $106.9 billion to $33.9
billion.

The falloff in lending, which means lower fee income, is behind the
fund's emerging financial crunch. In the short term, the IMF is
considering selling some of its estimated $62 billion in gold. In the
long run, de Rato says it needs to find a new business model.

Everyone's a critic

In recent months, the criticism spread beyond the emerging markets
countries still nursing anti-IMF grudges. Last fall, the fund's largest
shareholder -- the United States -- joined the chorus. Tim Adams,
Treasury undersecretary for international affairs, slammed the IMF as
"asleep at the wheel" on its key job of exchange rate monitoring. The
September speech came as the U.S. was trying to enlist the IMF in
pressuring China to allow its currency to rise and thus reduce the
ballooning U.S. trade deficit.

As this weekend's meeting has approached, similar complaints have
echoed. On March 30, David Dodge, the head of the Canadian central bank,
compared the fund to a passive umpire. "Instead of making the tough
calls about the rules of the game, the IMF has sat in the umpire's chair
and simply asked the players whether they thought that their shot was in
or out," he said.

Mervyn King, governor of the Bank of England, that country's central
bank, warned in a Feb. 20 speech that the fund "could slip into
obscurity" if changes aren't made. As an example of the IMF's sluggish
workings, King cited its 24-member Executive Board.

Each board member is swamped by 80,000 pages of reading each year --
more than 300 pages per working day, King said. The board needs to stop
micromanaging and allow de Rato greater latitude, he added.

Still, the IMF also is far from solely responsible for the current
stalemate. The organization can take decisive action only when there is
consensus among its leading shareholders. With government leaders in the
United States, Japan and just about every major nation in Europe in
weakened political positions, there is little chance today of charting a
dramatic new course.

IMF supporters say that with the strategic review he launched shortly
after taking office in 2004, de Rato has begun the overdue
modernization. His initial steps appear to have mollified one of his
toughest critics.

In an interview last week, Adams applauded de Rato's new strategy. "A
tremendous amount has happened since last fall. ... I'm actually
heartened by what I've seen from the fund," he said. "Now comes the
tough part of implementing it."