Who's afraid of the IMF?

The International Monetary Fund has ended its annual meetings without doing anything to enhance its credibility and effectiveness. In the process, as Finance Minister P Chidambaram warned in Washington, it risks becoming irrelevant. To start with, the backdrop to the meetings was unpropitious. A decision in June to change the norms for IMF surveillance of member-countries' economies had been contentious, with China particularly incensed that the new norms were designed to make surveillance more intrusive when it came to exchange rate management. But this "reform" became farcical pretty quickly because the first criticism to be issued was against the United States, with the IMF declaring that the dollar was over-valued. This was hardly a novel point, since it has been made by many American economists over the years, as also by a Congressional committee set up at the time of President Clinton. But the US responded that there was no reliable way to value a currency, thus under-cutting its own campaign to tar China as a country that systematically under-values its currency.

The June decision on surveillance was followed by the appointment of a new managing director, yet another European, despite calls for broad-basing the search. This confirmed yet again who were the real members of the club. India and others have long argued that voting weights at the Fund should be assigned on the basis of GDP measured in terms of purchasing power parity "" which would give China and India the largest voting power, next only to the US. This was clearly not going to fly, so they have agreed to a compromise formula, which is yet to be evolved. Mr Chidambaram has rightly warned that if a decision is not taken by the spring meetings, the Fund risks becoming irrelevant.

That is because the Fund today is not playing its primary role as the lender of last resort to any high- or middle-income country (a category that now includes India), other than Turkey. The Fund had little influence over the rich economies even earlier; now it has little influence over the emerging market economies too, since they have decided (after the experience with the IMF in the 1997 Asian crisis) that they are better off building up their own foreign currency reserves. If the Fund is therefore reduced to a body that gives advice on good macro-economic management, and its opinion is valued most by those in charge of private international capital, then the developing countries are likely to view the body as an agent of such capital (a point that goes back to its handling of the 1997 crisis) and not one that has its member-countries' interests at heart.

This could be tackled if the voting issue were to be resolved, because the Fund would then become a more representative body. But such change is blocked because the developed countries seek to use the Fund as a weapon against the rising economic powers. The US treasury, for instance, wants the Fund to start overseeing the new sovereign funds that are run primarily by Abu Dhabi, China, Singapore and Russia, apart from Norway, although their role and size certainly do not make them any kind of threat to the international financial system; indeed, there may be a better case for the IMF to look at the role of hedge funds, but the US (which is the home of most of those funds) would never suggest that. If such hypocrisy persists, Mr Chidambaram's prediction of irrelevance may turn out to be prescient.