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IMF searches for role in global credit crisis
January 25, 2008 / 12:17 PM / 10 years ago

IMF searches for role in global credit crisis

By Lesley Wroughton - Analysis

WASHINGTON (Reuters) - The International Monetary Fund, which ladled out billions of dollars in the past to rescue developing nations from economic peril, is struggling to find its feet in the current global credit crisis affecting rich-world countries.

Some IMF members want the global lender to step up its monitoring of global economic activity in order to heighten its profile in a world complicated by the rising influence of emerging economic powers and the explosive growth of cross-border capital flows.

In fairness, IMF officials have warned for years that the U.S. housing market was soaring at an unsustainable pace and that Americans were saving nothing, but that has not spared it from criticism that its calls for action were ineffective.

Current disruptions in global credit markets, due to losses suffered in the U.S. mortgage market, are different in scale and nature from the problems faced by smaller developing economies that were the IMF’s focus in the past.

“The issues posed by the latest developments are extremely different from those that were the hallmark, for example, of the 1980’s debt crises or even the 1997-98 Asian currency crisis and its aftermath,” IMF First Deputy Managing Director John Lipsky told Reuters.

“The development of large-scale capital flows has changed the elements of judgment about what is sustainable and what is desirable in terms of economic and financial policy,” he said.

Furthermore, the economic landscape has been complicated by the growth of record current account imbalances and the power of government-owned wealth funds and pension funds.

“All of these have rendered the situation significantly different that what we would have thought of before,” Lipsky added.

The fact the current crisis arose in the United States -- the Fund’s largest shareholder and one that has long ignored the IMF’s advice -- adds an extra layer of difficulty for the IMF as it offers its help in resolving current economic woes.

SETTLING MARKETS

Top U.S. officials give the IMF a slightly condescending nod of approval for its willingness to contribute to calming markets, but relentlessly insist that it must change to fit its members’ ideas of what is needed from it for the future.

“I think the IMF has played a very active role (in the current financial crisis). They are participating in the FSF process, so I think the IMF is very engaged,” U.S. Treasury Under Secretary for International Affairs, David McCormick, told Reuters at the World Economic Forum in Davos.

“The United States position has for some time been that the IMF needs to continue to reform itself to reflect the changing distribution of global economic power.” he added.

Some members of the rich Group of Seven nations say that what is needed is for the IMF to offer its prescription for the global economy’s woes more loudly and authoritatively.

“It is going to be harder,” said Raghuram Rajan, the IMF’s former chief economist and now a professor at the University of Chicago’s business school. “What you bring to the table is just a sense of impartiality, you’re outside the system and therefore you can speak your mind and you’re not a prisoner of Wall Street, you’re not a prisoner of any other interests.”

But he concedes the United States, the long-standing dominant global economy, will likely resist.

“To the extent that you say something that is in the interests of the system as a whole, others -- the Europeans, Japanese, the Chinese -- can sign on to what you say, and therefore put more pressure on the US,” Rajan said.

“But you can’t do anything directly in the U.S.,” he added.

Some analysts see the IMF’s role also as coordinating policy responses to the crisis.

In 2006 it led multilateral consultations between the United States, China, Japan, the euro zone, and Saudi Arabia to address global economic imbalances.

“The IMF is very skilled at pulling information together from its 185 member countries and the most important value added would be using the IMF to draw up a coordinated response plan with policy adjustments in various member countries hit by the crisis,” said Domenico Lombardi, president of the Oxford Institute for Economic Policy and senior scholar at Washington’s Brookings Institution.

“We’re witnessing a crisis that is still evolving, so it may be in the interest of the US to give some more prominent role to the IMF given that this crisis originated in the U.S. but has been globally exported,” he said.

Reporting by Lesley Wroughton

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