Sunday, November 28, 2010

The Rise of the IMF

Irish Times: Efforts Intensify to Finalise Bailout Package by Tomorrow
New York Times: Debt Crisis Highlights I.M.F.’s Renewed Role
Bloomberg: Serbia Accepts IMF Terms, Paving Way for Loan Tranche

This year alone, the IMF has given loan packages and credit lines to Ireland, Colombia, El Salvador, Greece, Jamaica, Mexico, Poland, and Ukraine. Serbia is expected to join that list soon, and few would be surprised if Portugal and Spain accepted IMF aid in the near future. IMF’s active involvement throughout the world since 2007 has increased its legitimacy and made more countries inclined to accept IMF aid.

Two reasons for the IMF’s greater authority are its changes in policies and structure. The IMF gives out conditional loans. The conditions are various economic reforms recommended by the IMF. The IMF now gives central banks greater freedom to structure aid packages, retracting the old policy that central banks could only target a very low level of inflation. The old policy was an unpopular one because the central bank had to restrict the money supply to achieve low inflation, and restricting a country’s money supply slows its overall economic growth. The IMF also mandated severe budget austerity programs to decrease government borrowing and eliminate the prospect of future inflation. Decreasing borrowing alleviated long term concerns that the government would increase the money supply and then use the less valuable, and thus inflated, currency to repay its debts. Although unpopular, the old policies were effective at fighting inflation. The IMF also allows developing countries to exercise mildly protectionist measures in severe situations to help domestic industry where the IMF was previously against protectionism in any situation.

Structurally, the IMF has reorganized itself by giving more voting authority to Asia at Europe’s expense. The redistribution of power has given the IMF more legitimacy to many in the developing world as many feel the IMF now reflects their interests. Another sign that the IMF is incorporating more of the developing world is that the next Managing Director of the IMF is not expected to be from the developing world. Kenneth S. Rogoff, the former Chief Economist of the IMF, finds it “inconceivable that they’ll have a Western European or North American as the next Managing Director.”

The IMF has also taken on a new role as advisor. The G-20 economic powers gave the IMF the task of correcting the balance-of-payments distortion which is a source of political and economic danger between Asia and America. This is a massive task that lies at the heart of the global economy.

The IMF and EU bailout of Ireland shows the IMF’s traditional role as lender, and its new role as global economic advisor. The total loan of €85 billion comes from a variety of sources, only one of which is the IMF. However, the IMF is in charge of supervising the use of all the funds and advising Ireland’s economy policymakers. The IMF is seen as the best institution to monitor policy reforms and is highly valued in that capacity.

While the IMF has increased its power in recent years, it still issues the same type of conditional loans it always has. Serbia and IMF recently reached an agreement, subject to approval by the IMF Board of Directors, for anther loan tranche from the IMF in exchange for Serbian economic reform. Serbia will reduce its budget deficit from 4.8% to 4.1% of GDP this year, freeze subsidies at 2010 levels, and allow for only modest rises in public wages and pensions. The IMF will also oversee the reform of the pension system.

1. The IMF is the leader in the G-20’s effort to diminish the trade imbalance between Asia and America. Will the IMF be as successful advising China and the United States as it has previously been with smaller nations?
2. Does the fact that the IMF is now directing most of its energies towards European issues please or displease the developing world?
3. Given the increasing economic power of the developing world, how many more changes in the IMF’s structure can be expected in the next twenty years?

No comments: