This phase too passed, and when the Funds leitmotif was coming under question, the debt crisis of the developing countries got triggered by greedy policies of the major banks in industrial countries. Emphasising the linkages between Third World debt and the international monetary system, the Fund redefined its role to make itself relevant.
The fourth development globalisation of financial markets seemed to have knocked out the very foundation of the IMF. Its usefulness as a source of financing payments difficulties of member countries was severely undermined by easy access to the worlds capital markets. Right then, Mexico, the country which gave the Fund a new lease of life with its huge debt, obliged it again when its capital account virtually capsized with a speculative attack on peso.
Though the IMFs jurisdiction had been limited to current account transactions, it took upon itself, and rightly so, the responsibility to rescue the countrys capital account through mobilising massive resources from rich countries. It has now been empowered to monitor the capital accounts of all member countries and as a quid pro quo, it has acquired a mandate to raise resources for financing countries in crisis ignited by unpredictable movement of short-term capital.
The present East Asian currency turmoil has further strengthened the IMFs leadership. So it appeared, until Japan exploded the bombshell a little before the Fund annual meeting in Hong Kong by floating a trial balloon of an Asian fund organisation for mutual assistance to countries in East Asia. Both the IMF and the US, a major shareholder in the Fund with a dominant currency, stoutly opposed this move, arguing that it would weaken IMFs surveillance of the monetary system by diluting conditionalities, and that it was superfluous, when the Fund had been doing the same on a global scale in a non-discriminating manner.
When Japan, canvassing the support from the other East Asian countries the recent victims of the currency run almost made it a fait acompli, both the IMF and the US offered to co-operate with Japan and its cohorts for setting up an Asian fund. It has even proposed to constitute a separate surveillance group to monitor the East Asian economies in the context of financing arrangements.
Over the years, Japan has been evolving strategies for a separate Asian arrangement for mutual assistance in the event of a currency crisis. First, it questioned the present format of conditionality imposed by the IMF on the ground that it was not universally applicable in view of institutional and situational diversity. Those who are habitual critics of the Fund mistook the Japanese alternative as justifying State intervention in the economies. In fact, it was a clever subterfuge to muster support from its neighbours. Japans own stance on conditionality, in essence, is no different from the Funds except in nuances, but it used it as a precursor of the Asian fund only because it would be a dominant influence.
In the geopolitical game that is being currently played out by Japan and the US, it is of vital importance for Japan that it creates a different forum where its voice will be heard as resoundingly as that of the US in the IMF, and there is no better time than now for striking a bargain with the US and other industrial countries.
When Thailands financial package was mooted, Japan took the lead to raise virtually all the contributions to the financing pool. It was no more than the first step toward the Asian fund. Its significance was initially lost on the US and the IMF and by the time it dawned on them, the horse had already bolted away. The US tried to salvage the damage done by chipping in with its modest contribution to the IMF-organised financial package for Indonesia, but it was too little, too late to reverse the tide. At one stroke, Japan carved out a niche for itself without rousing the suspicion of its neighbours that it was reviving its much feared pre-war policy of Co-prosperity Sphere.
Surveillance of East Asian countries by a separate group, and financing by the Asian fund, is a thin end of the wedge opening a space for challenging the IMFs hegemony. It is also the beginning of a grouping with a dominant role for yen that would evolve as a counter to the EMU, with a corresponding role for the German Deutschmark. The surveillance of East Asian countries, though rationalised by the Asian fund, is likely to be no different from the IMFs. It would minimise the IMFs role in East Asia in the same way as it may do in the EMU with its own macroeconomic guidelines. It is one of those inscrutable ironies that an institutions eminence should be threatened just when its influence is at its peak.