By K R Sudhaman
International Monetary Fund, one of the two Bretton Woods Institutions to meet economic challenges in the aftermath of Global recessions of 1930’s and the Second World War is certainly at cross roads. It is now neither fully equipped nor has the financial muscle to deal effectively and fully any future global crisis. But at the same time one cannot ignore or do away with IMF as the World needs a lender of last resort to handle financial crisis of the 21st century as the multi-lateral institution did with a great amount of success in the 20th century.
It has bailed out many countries including India from balance of payment crisis In case of India it was truly a lender of last resort on three occasions in 1966, 1980 and 1991. Since 1991 India has not borrowed from IMF in view of ever swelling foreign exchange reserves since economic reforms of 1991. On All the three occasions, India returned the loan ahead of schedule.
But the moot point: is IMF equipped to handle global financial crisis now as financial requirements are much larger. The best illustration could be the 2008 global financial crisis. In the aftermath of this crisis several countries required huge bailout package, particularly countries like Greece. Though India faced difficult situation, it was spared of any balance of payment crisis requiring any bailout due to strong economic fundamentals and high growth of over 9 per cent for 4-5 years preceding the 2008 global crisis. But several other economies in the World needed huge bail out and one estimate at that time suggested that the requirement was around $3-4 trillion, whereas all the resources put together in the command of IMF was merely $360 billion.
In the light of this situation, it has made economists wonder whether IMF is relevant in 21st century. According to V Srinivas, IAS officer, who is presently additional secretary in the Indian government, IMF is still relevant to deal with global financial crisis but would necessitate a larger fund for massive bailout packages. Emerging market economies like India should have greater role and quotas.
Srinivas, who has served in finance ministry and IMF as OSD to India’s executive director, has recently authored a book on India’s relations with the IMF.
IMF had in some ways become irrelevant in the mid 2000s with several countries building reserves and in the absence of any significant crisis. It also faced severe criticism from leading economists and civil society. Many at that time argued that IMF had outlived its mission and the time has come for it go into oblivion.
Further, the 2008 great recession and global financial crisis exposed the inconsistencies in the fund surveillance necessitating significant changes. This led to rise of G20 as the highest level of multilateral international cooperation. The advanced economies had to resort to un-conventional monetary policies and quantitative easing and large-scale asset purchases to flood the system with liquidity.
The global crisis hastened the IMF quota reforms to improve global economic governance. This was necessitated as, according to Srinivas there was a large gap between economic reality and quotas. The 2010 IMF quota and governance reforms were fully implemented by 2016. The implementation of quota and voice reforms enabled IMF to become better equipped to deal with situation arising in 21st century, partially regaining its relevance.
More than 6 per cent of the IMF quota shares were shifted to dynamic emerging market economies from over-represented to under-represented members. The advanced European economies agreed to reduce their combined Executive Board representation by 2 chairs.
The top 10 Quota shares on the IMF board now are US, 16.66 Japan 6.21, China 6.14, Germany 5.37, United Kingdom and France 4.07, Italy 3.05, India 2.66, Russia2.61 and Brazil 2.24 per cent.
Srinivas highlights the fact that two developments stood out – increased multilateralism with the G20 framework representing the 19 largest economies and the European Union becoming the coordinating body for handling global crisis and the rise of China in the International Monetary system wielding an all time high influence in international institutions.
Srinivas also emphasised that IMF though relevant even today needed further reforms including increased role to India in the future programmes.
He flagged the future challenges for IMF governance, which are basically the even handedness of Fund surveillance, the Fund’s work on financial sector and exchange rate management and the new priorities and policies for the Fund.
The IMF has moved a long way forward with the outgoing Managing Director Christine Lagarde diversifying the IMF agenda to cover non-traditional areas of inequality, gender and climate change. There have been changes in the Fund’s views on capital flow management and fiscal policy as well. It now promotes social safety nets in Fund programmes. There has also been a 3rd dimension to enhance engagement with civil society during Fund-bank annual meetings. The 3 pronged approach of espousing non-traditional issues, promotion of social safety nets in Fund programmes and civil society engagement during Fund-Bank annual meetings have changed the perception of Fund programmes as those which cause immense hardships with deep cuts in social sector spending.
There is a view emerging that IMF should also explore ways to promote trade as engine of growth in emerging economies particularly when globalization is at cross roads with trade wars and increasing protectionism getting on to centre-stage of global economy. China is one of the major beneficiaries of globalization resulting in its economy leapfrogging in the last couple of decades. Now it is time for emerging economies like India, which is now among the fastest growing economies, need to grow rapidly in the next decade or two to lift over 300 million of its 1.3 billion people still in poverty.
For this promotion of free trade is essential by vigorously pursuing the incomplete Doha development round of multilateral trade negotiations at the WTO. IMF along with other multilateral institutions would do well to ensure that emerging economies like India do not have stunted growth due to increased protectionism. IMF could play a key role in coming out with correctives to end the growing trade wars and hence fully regain its relevance. (IPA Service)