The IMF is 70 years old. It was founded in another era, when the Great Powers ruled the world. The postwar settlement at Bretton Woods was based on the realisation that the war ravaged Europe would be short of foreign exchange reserves and hence unable to service its foreign debts. Keynes was particularly aware that the UK could not sustain its key currency role for sterling given its forex reserve position. Thus, a system of fixed exchange rates was created with the Gold Exchange standard at its base and dollar as its principal key currency. The IMF was going to monitor the system of fixed exchange rates. Currencies could not fluctuate more than 2.5% either side of parity. Larger devaluations required IMF permission. There were strict controls over capital movements across borders. The US and Europe divided the leadership of the Bretton Woods institutions between themselves, with the US getting the World Bank and Europe, the IMF.
In August 1971, the US reneged on its obligation to buy gold at $35 an ounce. The Bretton Woods system collapsed. The international exchange rate system has since been based on flexible rates. At this point, IMF lost the purpose for which it was designed. It still had the ability to financiallly help countries faced with balance of payments crises. These vulnerable countries were then supervised by the IMF and asked to implement policies which were often inimical to their growth and their sovereignty from their point of view. The IMF was a convincing bully for weaker economies.
Even so IMF failed to foresee the debt mountain incurred by developing countries during the 1970s, after the Oil Shock, and much of the 1980s were spent by these countries in getting out of unsustainable debts. Its response to the Asian crisis of 1997 reinforced its image of being an organisation hostile to developing countries. Of course, when the Eurozone countries faced similar problems, the IMF was exceedingly accommodating and became an active supporter of soft policies which, if anything, postponed the required adjustment. One example was the reluctance of all concerned to allow haircuts for the unsustainable sovereign debts or to bail in the creditors. One reason for the softness of the IMF in the Greek case that emerged in 2010 was the undisguised Presidential ambition of its then Managing Director, a French person. It did not help either Greece or him.
The IMF had taken upon itself to monitor financial stability as a new task in the first decade of the 21st century. One can only say that it failed miserably in either forewarning or preventing the financial crisis when it came. The contrast with the BIS is striking in this case. The IMF has also taken on the task of being a macroeconomic forecaster for its members. Here again, the performance is not great as was shown by the debacle concerning the UK?s austerity policies, something which the IMF misread completely.
It is often said that an institution would have to be invented if it did not exist. This is usually said about failing institutions?the UN, for one, and now, the IMF. But it is not clear why the IMF should continue the way it is. It is clear that given the weightage of voting rights, it can only be reformed with the connivance of the US. It is anybody?s guess when we will have a US President powerful enough to implement the quota changes required for the reform of the IMF with support from a willing Congress . The problem is with the faulty structure that was set up at the origin, with Big Power hegemony at the centre of it rather than democratic participation.
The lack of democratic legitimacy is also at the heart of the manner in which the managing directorship has been presumed to be the monopoly of Europe. There was a small relaxation of this constraint when Dominic Strauss-Kahn had to be suddenly replaced. The job was advertised but at the end the non-European candidate did not get enough support. It remains to be seen if at this juncture?two years ahead of Christine Lagarde?s end of tenure?the IMF Board will genuinely seek an open recruitment to its top job.
At its 70th anniversary, the question needs to be asked: Could the world do without the IMF? What is the market gap it fills and, if there is such a gap, is the IMF the best body to provide the solution? Such a debate will not happen amidst the anniversary celebrations. But the Emperor may not have any clothes.
It may not be possible to abolish the IMF but it does need to be reformed and made more efficient and more responsive to the needs of its members, especially the poorer ones. A transparent search for the next managing director is at the heart of this challenge?to signal that the IMF knows the world has changed.
The author is a prominent economist and Labour peer