The Silent Revolution Inside the IMF

The IMF, at long last, is becoming a much more open institution. Gone are the days when the institution acted as a handmaiden of Western — and mainly U.S. — economic orthodoxy. It is even throwing a gauntlet down to the mighty U.S. Federal Reserve, questioning the effects its constant monetary boosting has on the rest of the world.

Given that the IMF is the key arbiter on many key issues of global finance and economics, and hence also of global fairness and equity, that is to be greatly welcomed. Over the past decade, the reform debate had centered mainly on giving emerging market countries more voting power, by commensurably reducing the voting shares of the “rich” world.

Given global economic dynamics, that adjustment is of course long overdue. In recent years, the Fund’s senior-level staff has also become less European and much less American. The first substantive consequences of these shifts are now beginning to emerge.

The frontline of this fight is the IMF’s Research Department, where old school guys (yes, mostly guys) and rich-country governments battle the new thinkers. Take, for example, the Fed’s announcement in September of a third round of quantitative easing (QE3). From a U.S. perspective, the big boost of the money supply is intended to stimulate economic growth — and therefore job creation — at home.

The extent to which these measures actually achieve that goal continues to be the subject matter of much controversy, even in the United States itself. What is not controversial is that these measures can have a negative impact on emerging market countries.

Policymakers there would generally all agree that it is important to have a growth-oriented U.S. economy. But there is growing concern as to whether U.S. authorities are not increasingly poking in the dark with their policy measures. QE3 has mainly boosted the stock market, not the real economy, and even the stock market effect is wearing off.

Either way, emerging market countries are no longer willing to acquiesce. Brazil has stepped forward to lead the defense — and that has many U.S. policymakers upset. Perhaps not so surprisingly, it has also generated a lot of negative press about the country in U.S. media.

Enter the now more open-minded IMF. As Boston University professor Kevin P. Gallagher has documented, the IMF has issued a whole range of reports that all cast a critical eye on the spillover effects that quantitative easing in the United States has on emerging market economies.

The IMF found, for example, that lower interest rates in the United States were associated with a higher probability of a capital inflow “surge” into emerging market countries.

And it declared that these surges in capital inflows can cause currency appreciation and asset bubbles. These, in turn, can make exports more expensive and de-stabilize the emerging markets’ domestic financial systems.

In order to fend off these problems, the IMF is warming to the view that it may well be advisable to deploy countercyclical capital account regulations, as Brazil, Taiwan and South Korea have begun to do.

This move flies in the face of the old IMF orthodoxy. Largely at the behest of the U.S. Treasury under secretaries Bob Rubin and Larry Summers during the years of the Clinton Administration, it has long preached the gospel of unfettered capital market liberalization to the newly emerging economies.

What shines through all these technical-looking arguments is that the burdens of adjustment are no longer automatically imposed on the recipient countries in the South. The nations in the North, mainly the United States, may need to regulate the outflow of capital from their shores.

Powerful new voices, such as Singapore’s long-time Finance Minister Tharman Shanmugaratnam, who serves as the chairman of the IMF’s key Policy Steering Committee, and his Brazilian colleague Guido Mantega have seen to it that that the notion of “global governance” is finally obtaining some real-life meaning.

Global governance reform is about far more than just changing voting rights in the IMF’s and the World Bank’s executive boards. It concerns a very hands-on process to ensure a fair and equitable sharing of the burdens of adjustment in the global economy and finance.

The success of this campaign owes much to the fact that the richer countries from the Global South also now act very much as global lenders. As a result, it can no longer be said that a bigger role for the emerging market countries would mean putting the borrowers in charge of an institution that rightfully should be controlled by the lenders.

The world at large has reason to rejoice in the fact that the IMF is taking off its self-imposed ideological blinders. If the current trend continues (and all indications are that it will), this would represent a big step forward for better global governance.

That this happens in the field of global finance makes it that much more meaningful. It is a key step in reining in an industry that has completely lost its focus on serving the real — not the surreal — economy and whose machinations have proven to have effects akin to nuclear radiation.

Editor’s note: Versions of this article have appeared in The Netherlands NRC Handelsblad [pdf] on October 12, in Brazil’s Valor Econômico [pdf] on October 11, and in Poland’s Rzeczpospolita [pdf] on October 10.