by Arvind Subramanian, Peterson Institute for International Economics
Op-ed in the Business Standard
May 26, 2010
© Business Standard
The financial crisis of 2008–09 and the sovereign crises of 2010 have allowed the International Monetary Fund (IMF) to reclaim the mantle of the institution as one before which "insolvents must fawn." Dominique Strauss-Kahn, the IMF's managing director, will deservedly get credit for using the crisis to snatch preeminence from the jaws of looming irrelevance, an irrelevance once threatened by the global scarcity of insolvents.
Not only is the IMF once again at the center of things, its current clientele of fawning insolvents now includes rich industrial countries such as Iceland and Greece, with Spain, Portugal, and Ireland as potential future clients. And the halo around Dominique Strauss-Kahn shines especially brightly because the IMF's Bretton Woods twin, the World Bank, drifts rudderless and diminished.
But Asia needs to wake up because the IMF's resurgence has once again underlined why it remains not an international but a Euro-Atlantic monetary fund. When the Europeans and the IMF announced that the latter's balance sheet would be put on the line for Europe, people asked: With whose permission? The United States appears to have been part of the decision-making process, but the rest of the IMF membership, especially in Asia, does not seem to have been consulted nor really asked to approve this decision. To be fair, skittish 24-hour markets do not afford the luxury of time-intensive consultation and democratic decision making. But if this had really been an international monetary fund, a much more serious effort of consultation would and should have been made. If Asia feels miffed, it is justified in feeling so.
But the IMF-in-Europe saga raises more substantive concerns. Europe desperately needed the IMF's resources to rescue its periphery countries. But the IMF's coffers have not been replenished as they were supposed to have been consequent upon the agreements struck last year. Recall that the member countries were supposed to contribute about $600 billion of additional resources to strengthen the IMF's lending capacity. And guess who has not come through on these pledges. The major eurozone countries had committed substantial resources but have failed to take the necessary domestic action that would translate these commitments into disposable cash for the IMF. The crisis afforded an opportunity for the IMF's managing director to press Europe to take this action—after all the money was needed to plow back (potentially) into Europe. But Europe was not pressed, and it is still unclear when it will pay up.
However, the most substantive problem relates to governance reform at the IMF, with Europe constituting the principal impediment to it. Europe is overrepresented in terms of voting shares; it has too many voices speaking on its behalf in executive board discussions, and, above all, it has one of its own running the institution to take the late-night phone calls from Brussels, Paris, Berlin, and London.
With Europe in trouble and in need of IMF help, this was the most opportune time for concessions to be extracted from Europe. Not to put too fine a point on it, Europe for once did not have the bargaining power. The leverage that others had because of European weakness should have been exploited for three ends: to force Europe to reduce its voting share and to give up the veto it (and the United States) enjoys in decision making; to reduce its representation on the IMF's executive board; and, above all, to make it commit publicly that the next managing director would not be a European. And that leverage was not exploited because a European was at the helm. A European managing director with near-term political aspirations in Europe, founded on projecting himself as Europe's savior, was hardly likely to expose and exploit European weaknesses.
In the months ahead, governance reform at the IMF will once again occupy center stage. If Europe recovers, we can be quite sure that the status quo ante will be restored with Europe continuing to stymie IMF reform efforts. The voluntary ceding of power is rare in history, and a Europe suddenly stricken with remorse at the prevailing inequities is not on the cards. This is about power and Asia must play the power game. So if Europe's economic woes continue, Asia, while continuing to support a strong and supportive role for the IMF in Europe, must show its claws and force Europe to cooperate. If necessary, Asia must condition its support for an IMF role in Europe on the latter shedding its intransigence on IMF reform. And Asia should make reforms its highest priority to ensure merit-based selection of the next managing director.
Which country in Asia can provide a plausible candidate for the next managing director? Sadly, that is a question that has no ready or easy answer. And that uncertainty within Asia, reflected in inadequate Asian assertiveness—as much as European intransigence—is responsible for perpetuating the status quo. It seems increasingly clear that candidates for future managing directorship probably cannot come from the big Asian powers: China, India, Japan, or Korea. China creates anxieties within Asia; India, in the eyes of its Asian neighbors, is not convincingly internationalist or Asian, and Indian officials and intellectuals are still too uppity to put others at ease; and Korea and Japan are perhaps not perceived as sufficiently distant from the United States to take on the mantle of Asian leadership. Asia needs its own bridging power. As Sanjaya Baru has also suggested in these pages, the most suitable candidate at this stage seems to be Singapore, which demographically mirrors Asia, threatens no neighbor, is impeccably internationalist, and is increasingly acquiring the necessary soft infrastructure as a potential intellectual hub.
The IMF was always an institution in which the solvents had the power while the insolvents were supplicants. As we survey the economic wreckage across the globe, what we see is public sector balance sheets in the western world splattered with red ink while Asian balance sheets look respectably healthy. But the remarkable irony is this: The solvent Asians still don't have the power and the near-insolvent West still rules. How rigged is this world?
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Book: A Strategy for IMF Reform February 2006
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Working Paper 11-16: Asia and Global Financial Governance October 2011
Working Paper 11-5: Integrating Reform of Financial Regulation with Reform of the International Monetary System February 2011
Policy Brief 10-29: Strengthening IMF Surveillance: A Comprehensive Proposal December 2010
Working Paper 10-14: Reform of the Global Financial Architecture October 2010
Speech: Crisis and Beyond—The Next Phase of IMF Reform June 29, 2010
Testimony: The Role of the International Monetary Fund and Federal Reserve in the Stabilization of Europe May 20, 2010
Op-ed: How the Fund Can Help Save the World Economy March 5, 2009
Article: Economists Seek IMF Reform January 26, 2009
Policy Brief 07-1: The IMF Quota Formula: Linchpin of Fund Reform February 2007
Paper: What Next for Argentina? February 2004