Thursday, July 2, 2009



I’m excited that the IMF is up for some reform. They’ve mostly been marginalized in recent years and its role was being questioned, but the G20 summit leaders decided to increase its bankroll from $250 billion to $750 billion. Now, from where the extra $500 billion will come is still up in the air. There are some pledges but it’s not enough for the extra $500 billion. Still it’s quite exciting. There have been a number of things wrong with the IMF. I won’t go into some of the problems I’ve spoken about before. But here’s a brief list. In general, poor countries resent it as they don’t have much of a voice or say in its policies and to whom it lends. Rich countries don’t resent it but it’s somewhat unimportant or non-impacting. That is to say they may not feel they get anything from it and somewhat ignore it.

The first problem is who leads it. Yes, it’s multilateral or international, but different countries have voting shares. Guess who has the largest? Yes, the U.S.A. which makes sense (they give a lot of money to it), but the US has 17% voting. Since votes required 85% agreement, then the use can veto any vote (100% – 17% = 83%). So the first change recommended in Trevor Manuel’s (South Africa’s Finance Minister) team’s March 24th report is to cut the 85% requirement down to 70-75% which removes veto power from the U.S. The G20 leaders did not say anything about this, so this may stay as it is for the time being.

People are talking about vote/quota reform in general. One idea is to decrease everyone’s voting shares by 20% and take the extra 20% and sell them to countries that want them the most.

Another is to vary up the IMF leader’s nationality more so that it’s not just Europe-led (the way the World Bank always has an American leader). In other words, the appointment should be an open process where non-European leaders have a fair change to head the IMF. The G20’s leader’s resolution implies this will be the case.

Trevor Manuel’s team also recommended a supervisory council of central bank governors and finance ministers. This would provide a means for coordination (badly needed) and economic strategizing which is needed to stabilize the global economy. In other words, we need coordination between the IMF and political leadership within countries. The G20 leaders did not explicitly speak about this in terms of measurable steps though they want “greater involvement of the fund’s governors” in providing direction for the IMF.

Lastly, there’s a stigma with getting money from the IMF. It’s like going bankrupt for instance. You feel your country has failed and is being bailed out. So countries are reluctant to go to the IMF and only do so as a last resort which reinforces the stigma. Countries like China have built up huge reserves to avoid doing just that.

So the IMF has now started a line of credit without the normal “strings attached” as opposed to the normal bail-out loans with the normal policy requirements and “attached strings.” They are trying to become a viable credit line for the world, in a sense. Mexico is the first to take the IMF up on this Flexible Credit Line (FCL). Mexico is asking for $47 billion under the FCL, and we’ll see if it actually happens and if others will join in. This is one reason why the IMF needs more money as this is a huge portion of the $250 billion dollars (some of which has been used).

The G20 will allow the IMF to also draw up quasi-currency called Special Drawing Right (SDR) to help ease liquidity. And a cool thing is hopefully the IMF will feel better about telling rich countries honestly when they have harmful policies to the global economy. Previously this has been hard to do with rich countries and mostly done with poor ones.

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