Structural adjustment

A good idea, in order to remain good, has to be implemented consistently well. This means it has to be implemented in a flexible manner to account for situational dynamics.

The newly appointed managing director of the International Monetary Fund (IMF), Roderigo Rato, who until recently was Spain's finance minister and someone credited with turning around Spain's economy, would do well to bear this mind as he takes up his five-year term.

He is fortunate in that his term begins at the start of a new century and because the IMF itself has been softened up by a barrage of criticism over the last few years. He should find less resistance to change.

His main job is to alter the way the IMF does what it was set up to do "" help out countries that face temporary shortages of foreign exchange so that they can pay their foreign creditor. In short, the IMF was to be an international lender of last resort. No one will dispute that the IMF has performed this role well.

But few will agree that the manner in which it has done so has been exemplary, especially in recent years. The rigid application of one-size-fits-all prescriptions has reduced the IMF's credibility, though perhaps not effectiveness. Mr Rato therefore needs to look for ways and means by which he can modify the IMF's modus operandi.

In order to do so, he will have to look around and identify the two or three most important ways in which the international monetary system, and the politics that drive it, have changed and acknowledge the changes.

The most obvious way in which the international monetary system is different now from before is that there is no global shortage of the internationally acceptable mode of payment, namely, dollars.

If anything, there is excess supply. It may be mal-distributed, as reflected in the foreign exchange reserves of China, Japan, and other East Asian countries. But there is no global shortage of the kind that there used to be when precious metals backed currencies.

As Kenneth Rogoff, former chief economist of the IMF pointed out recently, China and the other countries in East Asia have more dollars today than the IMF. It is but a short step from there for them to realise that if they put their mind to it, they can substantially alter the politics that drives the international monetary system by becoming lenders of dollars to countries facing balance of payments crises, or indeed by lending to the IMF for onward lending under the discipline of a loan programme.

This could mean loans on less onerous terms than the ones traditionally imposed by the IMF. Today, China, Japan and the rest are financing the US with no conditionality.

Why can't they combine with the IMF and divert some of their surpluses to, say, Latin America or Africa, in return for something they value? The IMF's monopoly on bail-outs may thus be coming to an end. Mr Rato needs to think about this.