Tuesday, July 14, 2015

Project Syndicate Article Calls for the IMF to Modernize

In a new article posted on Project Syndicate, authors Harold James and Domenico Lombardi call for the IMF to make some changes to become more relevant. It's mostly the same call for more representation for emerging nations at the IMF. They add to the list of voices calling for the Chinese Renminbi/Yuan to be added to the SDR currency basket later this year. Below are some quotes from the article and then a few comments.


"The international system of economic governance is at a turning point. After 70 years, the Bretton Woods institutions – the International Monetary Fund and the World Bank –appear creaky, with their very legitimacy being questioned in many quarters. If they are to remain relevant, real changes must be made."

The IMF, in particular, is facing challenges on all sides. In the United States, Congress is stalling not only on international issues like trade, but also on the implementation of reforms that would expand the role of emerging economies in the IMF. For its part, Europe has drawn the organization into its debt crisis, with Greece having already missed a payment on its IMF loans (though the Fund is not calling it a default). And, in Asia, the IMF still carries a stigma, because of its flawed response to the region’s financial crisis in the late 1990s.

How can the IMF reprise its role as a guardian of international financial stability? One solution could be to adjust its international reserve asset, the Special Drawing Rights (SDR), by adding the Chinese renminbi to the basket of currencies that determines its value."

My added comments:

There is an interesting kind of irony I run across while researching articles for use here on the blog. Critics of the IMF, the World Bank, and other global institutions often characterize them as almost all powerful organizations able to manipulate world events all over the globe in order to further their own power. On the flip side, those who are favorable towards the global institutions are more often criticizing them for being ineffective and seemingly unable to impact events as they unfold.

Here we have two authors who are likely friendly towards the IMF stating it is on the verge of becoming irrelevant unless it makes changes. They call for changes to the SDR currency basket and offer this comment later in the article:

"The logic behind the SDR’s creation was sound: The world needed an international reserve asset that mirrored global trade. But the plan’s execution has been flawed. The original SDR basket was too broad, just as the current version is too narrow. And the focus on officially held assets ignored the SDR’s potential value in private markets. These flaws should now be corrected."

I suspect the truth is more likely somewhere in between. The global institutions certainly do have power, but probably not the level of power some critics think they have. As we clearly see in the mess between the EU and Greece, there is always going to be a problem trying to get coordinated agreement whenever you have many different nations involved. No matter how much lip service is given to being "unified", there are always going to be individual national interests that politicians have to respond to. This problem only multiplies at the global level for the IMF. We see this clearly illustrated with the moves being made by the BRICS nations to construct alternatives to the IMF and the fact that the IMF cannot even get the US to approve the 2010 reforms. The IMF seems almost powerless to resolve those issues right now.

This is why change at the global level tends to move very slowly. It can takes years to decades to get everyone on board with a major change. The thing that can alter that timetable is if a genuine crisis arises. Under those conditions people can be more willing to accept significant changes more quickly. This is why some critics think the global institutions actually have a crisis planned so they can offer a solution of giving themselves more power to solve the crisis. Others like Jim Rickards just think these institutions are following bad models and are over confident which will result in them not seeing the next crisis coming. In a recent article, Jim quotes Ben Bernanke as saying he sees no signs that a systemic crisis is coming any time soon which seems to sum up the view of those inside the system.

One of the two big questions we are following here on the blog is whether or not we will get another major global crisis any time soon. If we do, we can expect to see efforts made to coordinate a response at the global level with the IMF in the lead. If we do not get another major crisis, we can expect significant changes to take place over years and decades instead of weeks to months. Many critics of the IMF think a crisis will come soon. Those working inside the system seem to feel a systemic crisis is not likely to occur any time soon. We'll follow it to see what actually does happen.

No comments:

Post a Comment