New role for the IMF

The International Monetary Fund (IMF) has got itself a new role, just when many were beginning to wonder what it would do if, in a world awash with liquidity and blessed with strong growth, no one wanted either its money or its advice. What, after all, is a doctor to do if no one is sick, or a bank to do if there are no borrowers? The answer is that the Fund has been looking for business in the wrong place, among the relatively small economies that have needed attention in the past, whereas it is the big bad boys who now need help: the US and China. So far, neither has been willing to listen to anything that the Fund has to tell them, nor has either been willing to pay heed to the other's position. This may now change.

Hammered out at the annual spring meetings, the IMF's new role has to do with re-balancing the world's fiscal and trade imbalances, so as to bring about the corrections that the US and China have refused to introduce on their own. Insofar as the mandate now given to the Fund is to look at China's currency policies, and Europe's role in pumping up demand, the US is transparently happy with the outcome. Washington has argued in recent years that its growing fiscal and trade deficits""which the rest of the world sees as the prime culprits threatening global financial stability""are in fact the result of insufficient global demand (read: European stagnation), and China's mercantilist policies that ensure massive trade surpluses. China, naturally, is less than happy with a mandate that seems to get the US off the hook. It has fired a broadside, arguing that the primary problem remains the US' low savings rate. Whether the IMF can close the gap between these divergent positions, and persuade every country to do its bit, is now the question.

The task will not be easy, nor can it be accomplished quickly. If China is to accept policies that will strengthen its currency, it has to first buttress its banking system, which, by most accepted standards of accounting, would be considered bankrupt. As can be imagined, correcting this will take time and a lot of effort; clearly, the IMF can help. As for the US, the Fund has already been telling it that its currency has to fall, and the dollar did indeed dip as soon as the new initiative was announced over the weekend. But there is also a strong section which argues that the dollar's strength merely reflects the dynamism and productivity gains being achieved in the world's largest economy. There is some truth to all these positions, and yet all of them cannot be completely true at the same time. Perhaps, the IMF is better placed than anyone else to try and bring about greater convergence. But without the power of a bag of gold to offer as a prize for listening to its advice, the Fund can only try moral suasion. In other words, everyone will need patience.

Meanwhile, India has lost out in its bid to prevent increased voting power for a handful of countries that got onto a high growth path earlier""like China and South Korea. However, the Fund's members have also agreed that a general review of voting rights (and the method for determining those rights) is required. That issue will now be taken up in the September annual meetings, but no one should expect quick agreement. If India and other rapidly growing economies (mostly in Asia) are to get a bigger say, as is the intention, the losers will be many small European countries, who will of course resist change. As always, the outcome will be determined by what position the big boys adopt.