The IMF looks for a job

The Board of Governors of the International Monetary Fund (‘the Fund’, more colloquially) and the Boards of Governors of the World Bank Group (‘the Bank’ -- predictably) meet in Washington on Monday for their annual meetings to discuss the work of their respective institutions. This year’s meeting is well-timed, as the world is gripped by the unrelenting turmoil in financial markets. For the Fund especially, this will draw attention away from continuing efforts to reform its governance and transparency.

The IMF, having become an institution in the service of emerging market economies, has been caught out by a crisis taking place across the developed world instead. The IMF is just too small to bailout any major developed economy. However, nor is the Fund much use in its old turf -- since the crises of the late 1990s, many emerging markets have built up massive foreign exchange reserves and have markedly improved their fiscal situations, making IMF money less essential in the event of a crisis. It can help emerging markets with large current account deficits a little, but might do the most good as a conduit of information, collecting data that helps market actors and policy makers understand the scope and extent of the current crisis.

The Bank, meanwhile, has a more obvious job to do. Where developing countries will be hit by the current crisis is in contraction of aid budgets.  In the US vice-presidential debates, Democratic candidate Joe Biden indicated that overseas aid would be cut as an easy way to control the US budget deficit. Although the developing world has seen the emergence of a new middle class, millions still live below the poverty line and depend heavily on foreign aid.

World Bank President Robert Zoellick recently stated that the next US president would have to move beyond stabilizing financial markets to addressing the economic aftermath, and called for a ‘New Multilateralism’, which gives equal value to development as to international finance -– and more appropriate weight to emerging economic powers. Both the Bank and the Fund deal primarily with the developing world, but give such countries a limited say in their decision-making.  Pressure may grow for change in that direction, once the current crisis is weathered, as has been argued for by bodies including the IMF’s Independent Evaluation Office.

‘Multilateralism’ has its limits, however, in crisis response. Solutions to the current crisis are likely to emanate -- as they have done over the last month -- from national authorities, making calls for global economic governance ring hollow for now.