Even as
it gets difficult for the IMF to continue to function in the old way, it
is seeking to adapt itself and the environment to ensure the realization
of the same goals.
The
much-shortened annual joint meetings of the International Monetary Fund
and the World Bank were held in Washington D.C. in September this year,
in circumstances that were not the most propitious. As the IMF's
World Economic Outlook prepared for the meetings makes clear, in the
US, recovery from the recession that had set in well before the
September 11 incidents is losing steam rather quickly, necessitating a
downward revision of the Fund's April projections for growth in 2002 and
2003. This in turn will only aggravate the problem of sluggish growth in
much of Europe and the recession in Japan, since exports in both are
significantly dependent on buoyancy in US markets—therefore, the
prognosis for the world economy is by no means upbeat.
Elsewhere, matters are even worse. The problem of crises in emerging
markets persists, with some of the 'best-behaved' among them, by the
IMF's standards, such as Argentina and Brazil, facing severe or
potentially severe difficulties in both the financial and the real
sectors. Clearly, poor or even dismal economic performance characterized
not only those countries whose governments had mismanaged their
economies, precipitated a crisis and then turned to the IMF for help.
Rather, countries whose economic management had been declared exemplary
by the IMF were proving even more vulnerable. This implies that the
Bretton Woods institutions are failing in their self-appointed role as
monitors and managers of the world economic system. This, together with
the fact that the image of the 'efficiency' and transparency of US
markets, long held up as the example for the rest of the world to
follow, has taken a battering in the wake of an avalanche of revelations
of market manipulation, corporate accounting fraud and managerial greed,
lent credibility to and even validated much of the criticism of
capitalism, the Bretton Woods institutions and the WTO by
anti-globalization protestors.
These
circumstances have forced a response from the Bretton Woods
institutions, which are now struggling to win developed-country moral,
financial and institutional support for their role as guardians of the
world economic system. This renewed effort at winning legitimacy was
visible in many forms at the annual meetings held in September.
The most pathetic expression of the desperate search for legitimacy is
the effort to underplay or even deny the fact that world capitalism is
in the midst of one of the worst crises of performance, confidence and
legitimacy, in the post-war era. This came through in the statement made
by IMF Managing Director Horst Kohler at the closing press conference to
the September meetings, when he declared: 'We, of course, discussed a
lot about the global economy, and I was encouraged because there was no
doom and gloom discussion, but a differentiated analysis and some
realistic confidence that the recovery will continue.' Elaborating this
point, he said: 'There is a broad consensus coming from this discussion
that globalization has created unprecedented opportunities to improve
the wealth of nations, and this expression came not least from the poor
and emerging markets. But the members of the IMF and the World Bank are
also aware of the challenges and risks that come along with it. They
don't want less, but they want better globalization. We all agree that
we must make a conscious and determined effort to invest in better
globalization, to make it indeed work for the benefit of all.'
Statements like these, however, do not make the problems go away.
Globalization, and the kind of policies recommended by the IMF and World
Bank to countries that want to benefit from it, has indeed resulted in
slow growth overall and severe crises in particular countries. There is
acceptance now that a shift away from the IMF's conventional menu of
policies may be needed. One aspect of this shift, which the IMF has
tacitly supported in individual countries, is the adoption of a
reflationary stance with deficit budgets. Not only is the IMF berating
Japan, which has adopted close to a dozen reflationary initiatives, for
not going far enough, but it has also turned a blind eye to efforts by
crisis-ridden countries to ensure some growth by hiking the fiscal
deficit, as happened in Korea. What is more, the IMF Managing Director
has gone on record supporting the European Commission's decision to
delay the implementation of the stability conditions agreed upon as part
of the Stability and Growth Pact.
The new need for a degree of ambivalence is also reflected in the formal
changes made at this year's annual meetings, for the first time since
1979, in the conditionality guidelines that apply to IMF lending.
According to the IMF: 'Adoption of new guidelines for conditionality has
been motivated by an increasing recognition of the importance of several
interrelated principles for successful design and implementation of
Fund-supported programs. Chief among these are national ownership of
reform programs, parsimony in the application of program-related
conditions, tailoring of programs to the member's circumstances,
effective coordination with other multilateral institutions, and clarity
in the specification of conditions.' It should be clear that
'ownership', of the kind sought to be achieved through the PRSP process
and the Nepad initiative, is aimed at reducing the Bank–Fund
responsibility for policies that are increasingly tending to fail, while
'parsimony' and the 'tailoring of programs to the member's
circumstances' are aimed at giving the IMF and the Bank leeway to permit
policies such as deficit-financed spending in situations where typical
Fund–Bank policies have resulted in a crisis.
But even allowing for lax conditionality, the problem of crisis even in
healthy economies persists, as the differing experiences in Argentina
and Brazil illustrate. In a candid admission during a visit to Tokyo,
Horst Kohler is reported to have said: 'Recent experience should also
make us even more humble. The fact that it was not possible to avoid the
current difficulties in Latin America suggests that we still have a lot
to learn.' There are many consequences that follow from this 'learning
experience'. To start with, despite objections from some members to
investing large sums in rescue packages for countries facing payments
difficulties, the IMF, realizing that whimsical investor sentiment in
the context of elections rather than any major problem afflicting
Brazil's economy explains the weakness of the Real, has committed a
record $30 billion to help stabilize the Brazilian currency. The message
being sent out is clear. If countries meet their commitments as part of
the global liberalization agenda promoted by the Fund and the Bank, the
IMF should be ready to help these countries meet international
commitments as and when necessary, independent of whether such help
resolves the basic problem or not. To that end, the IMF has clearly
decided to win support for mobilizing adequate resources to finance this
role. It is now persuading members 'to consider, at the appropriate
time, an increase in IMF quotas to ensure that the IMF continues to have
the resources to be a confidence-building anchor for the international
financial system.'
But clearly, the IMF alone cannot carry the burden of financing these
rescue efforts. Unfortunately, in the view of the IMF, at present the
only available mechanism to deal with countries that have accumulated
unsustainable debt is a bail-out by organizations like the IMF. The
reason why restructuring sovereign debt rather than IMF-financing of
commitments due on unsustainable debt is proving increasingly difficult
was summarized thus by Anne Krueger, First Deputy Managing Director of
the IMF: 'In the 1980s, restructuring sovereign debt was a protracted
but generally orderly process. Typically the major creditors were
commercial banks, and they negotiated through a steering committee of
maybe fifteen people holding perhaps 85 per cent of the debt. … Today we
live in an entirely different world. Since 1980 emerging market bond
issues have grown four times as quickly as syndicated bank loans. With
many banks and bondholders now involved, private creditors have become
increasingly numerous, anonymous, and difficult to coordinate. The
variety of debt instruments and derivatives in use has also added to the
complexity with which we must deal. Bondholders are more diverse than
banks, and so too are the goals with which they approach a
restructuring… . Individual bondholders also have more legal leverage
than banks and are less vulnerable to arm-twisting by regulators. No
wonder countries facing severe liquidity problems often go to
extraordinary lengths to avoid restructuring their debts to foreign and
domestic private creditors.'
To deal with this problem, the IMF has been working towards revising the
contractual and statutory conditions governing international debt. Its
proposal has two components. First, insertion of collective action
clauses that require creditors to come to the table when the
restructuring of debt becomes inevitable. Second, creation of a Chapter
11 bankruptcy law-type of formal mechanism 'that would allow a country
to request a temporary standstill on its debts, during which time the
country would negotiate a restructuring with its creditors. The Fund
would only approve such a request if the debt were judged truly
unsustainable, a judgment that is clearly not an easy one to make.
During this limited period, the country would have to provide creditors
with assurances that money would not be allowed to flee the country, and
that policies were being put in place to ensure that the country could
repay its debts in the future.'
Difficulties in implementing this proposal are many. Above all, it would
require a uniform domestic bankruptcy law and enforcement mechanism in
every country, which would be impossible to achieve. However, the IMF
sees a way out: to establish a treaty obligation by amending the Fund's
Articles of Agreement, which requires the support of three-fifths of its
members, accounting for 85 per cent of the Fund's total voting power;
the majority decision would then be binding on all members. To realize
this goal the IMF requires wide support from the international
community, and that support is yet to be mobilized—but work on it has
clearly begun.
The objective of this unlikely legal framework is clear. It helps the
IMF help the international financial system, which, because of its
overexposure in some countries and its atomistic nature, is unlikely to
be able to stall default by working out appropriate restructuring. In
the event, stalling default requires the IMF to act like a 'lender of
last resort', providing finances to overexposed borrowers with
unsustainable debts to help meet their commitments. But with crises
coming in rapid succession, the IMF is hard put to play its role. Its
far-reaching proposal is thus aimed at creating conditions in which,
despite irrational practices, the business of finance can continue as
usual, the evidence of overexposure, herd-like behaviour and moral
hazards notwithstanding.
To summarize, even as it gets difficult for the IMF to continue to
function in the old way, it is seeking to adapt itself and the
environment to ensure the realization of the same goals. This is
inevitable, given the fact that the organization was created and is
sustained by the very interests it extends itself to support.
