the visible hand

it is the theory which decides what can be observed – einstein

IMF ‘must reform to remain relevant’

Posted by ecoshift on February 25, 2008

Well golly. I guess so. Time was the IMF would loan money to developing countries contingent on their adopting enlightened economic policies — adjusting them structurally. All for their own good of course. Turns out the countries that followed IMF advice the least are the ones in the best shape today. Now they are loaning us money and investing in our bailouts. We surely wouldn’t want any upstart sovereign wealth funds imposing any IMF style fiscal discipline on us should we fall behind by a payment or two or fail deliver expected returns. High time for some reform. All for our own good of course.

Joseph Stiglitz has a recent article Financial Hypocrisy that points out, in a much more professional tone:

“Looking back at the [Asian Financial] crisis a decade later, we can see more clearly how wrong the diagnosis, prescription, and prognosis of the IMF and United States Treasury were. Had, for instance, Korea’s problems been as severe and fundamental as they had suggested, Korea would not have enjoyed the rapid comeback it had. The fundamental problem was premature capital market liberalization. Malaysia imposed capital controls, and as a result it had the shortest and shallowest of downturns; and when it recovered, it was left with less of a legacy of debt. Yet this lesson seems to be ignored with respect to India. It is ironic to see the US Treasury Secretary once again pushing for capital market liberalization in India one of the two major developing countries (along with China) to emerge un-scathed from the 1997 crisis…

“The contrast between the IMF/US Treasury advice to East Asia and what has happened in the current sub-prime debacle is glaring. East Asian countries were told to raise their interest rates, in some cases to 25%, 40%, or higher, causing a rash of defaults. In the current crisis, the U.S. Federal Reserve and the European Central Bank cut interest rates, fearing the collapse that high interest rates could cause.

“The countries caught up in the East Asia crisis were lectured on the need for greater transparency and better regulation. But lack of transparency played a central role in this past summer’s credit crunch; toxic mortgages were sliced and diced, spread around the world, pack- aged with better products, and hidden away as collateral, so no one could be sure who was holding what. Yet, there is now a chorus of caution about new regulations, which supposedly might hamper financial markets (including their exploitation of uninformed borrowers, which lay at the root of the problem). Finally, despite all the warnings about moral hazard, Western banks have been partly bailed out of their bad investments. It would be reassuring if this contrasting attitude to today’s crisis represents a learning of what I preached ten years ago. Am I too cynical in suggesting that it is simply hypocrisy?”

To paraphrase Lily Tomlin: no matter how cynical you get, it’s hard to keep up.

Check out the whole article here:
Stiglitz, Joseph E. (2007) “Financial Hypocrisy,” The Economists’ Voice: Vol. 4 : Iss. 6, Article 2.
Available at: http://www.bepress.com/ev/vol4/iss6/art2

Now for the Financial Times article:


FT.com / World – IMF ‘must reform to remain relevant’
By Krishna Guha in Washington
Published: February 25 2008 22:18

The US stepped up its call for reform of the International Monetary Fund on Monday, calling for a shake-up of its executive board as well as its shareholding structure to give greater weight to emerging economies.

David McCormick, the undersecretary for international affairs at the US Treasury, proposed cutting the number of executive directors from 24 to 20 and eliminating the rule that reserves positions for the US, Japan, Germany, France and Britain. The proposal is likely to result in fewer European directors on the IMF board.

Mr McCormick said if a reform package were agreed in time, the Bush administration would go to Congress this year to seek approval for the sale of some of the IMF’s gold to establish an endowment to finance its operations.

The call marks an effort to renew the momentum for reform of the IMF. Dominique Strauss-Kahn, the new managing director, favours governance reform but has been focused on the credit crisis and, internally, on the need to find $100m in budget cuts. Mr McCormick said: “The IMF must reform to remain relevant.” Afterwards, he told the Financial Times that the fund had to update its mission, governance structure and financial model to be effective.

He pressed the IMF to make use of its recently enhanced mandate to monitor exchange rates more aggressively.

“If the IMF fails to shoulder this fundamental responsibility, all other reforms will ring hollow,” he said. He also called on the IMF to make “meeting the unique challenges posed by sovereign wealth funds” a second priority.

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