Wednesday, September 20, 2006 Vincent Lingga, The Jakarta Post, Jakarta
The International Monetary Fund took a major step Monday toward improving its acceptance and credibility among developing countries by adopting a package of reforms on quotas and voice in the IMF, with respect to its decision- and policy-making powers and the reshaping of its surveillance foundations.
These reforms are the first step in a long process that will increase the representation of many developing countries to reflect their rise in the global economy. Right away, the resolution of the IMF board of governors will increase the voting power of four countries -- China, Korea, Mexico, and Turkey -- that are most clearly underrepresented.
Equally important is that the board of governors has agreed the IMF must strengthen the voice and representation of poor countries that continue to borrow from the IMF but only have a limited share in IMF voting.
The reforms will improve legitimacy, in terms of how IMF governance is structured and how that is perceived among developing countries, which have long complained about what they see as the grossly unfair control of the IMF by developed countries.
Experience has shown it is not enough for the IMF, and its Bretton Woods sister -- the World Bank -- for that matter to prescribe the right policy advice. This advice is more likely to be accepted if it comes from an institution that is seen as representative of the interests of developing countries, which make up the majority of members and borrowers from the IMF.
The reforms just adopted by the highest policy -making body of the IMF will go along way toward improving IMF acceptance and credibility. The IMF's credibility will continue to be undermined if the monopolistic behavior of large countries with veto power is not checked.
Still encouraging is that more reforms are in the pipeline as the board of governors also has ordered the IMF executive board to reach an agreement on a new quota formula to guide the assessment of the adequacy of members' quotas in the IMF. Such a formula should provide a simpler and more transparent means of capturing members' relative positions in the world economy.
The present IMF quotas have been seen by most members as a distorted mirror of today's economy because they must do three things at once: They determine how many votes a member can cast on the board, how much money a country must put into the IMF coffers, and how many dollars a country can take out before attracting penalty interest rates. As a result, many countries are now underrepresented.
The reforms are implemented at a time when the IMF's popularity is at its nadir and its budget is shrinking because many of its best customers are now doing without it.
What then are the jobs of the IMF? Apart from generating mountains of analyses, the IMF's function is to inject foreign exchange in countries that have temporarily run short. But lately no one has been calling on its reserves. Brazil and Argentina have both repaid their debts. Even Indonesia has paid in advance half its $7.8 billion debts and plans to amortize the remainder later this year. Hence, now only Turkey still owes a significant amount of money to the IMF.
With no way of treating members in financial crisis with what "patients see as bitter pills", the IMF is left only with the power of surveillance, keeping an eye on the policies and frailties of its members. But even this surveillance role has increasingly been detested in many countries, especially in Asia.
But the fact is that, like it or not, the IMF's role as an emergency lender is still relevant, at least until regional financial cooperation can be expanded through reserve pooling. After all the IMF can immediately call on about $220 billion of hard currency if needed to help countries in financial distress.
True, South Korea, Japan, Singapore, Indonesia, China, Malaysia, the Philippines and Thailand, which together command international reserves worth 10 times the IMF total, have begun pooling a small fraction of their resources under an initiative launched in Chiang Mai in 2000. But this regional arrangement has yet to be tested.
If emerging economies want to insure themselves against financial crisis it would not be cost efficient to set up their own "safety net" to make emergency lending available. But how can the IMF, as an emergency lender to all countries, regain the confidence of its estranged members.
That is the main objective of the package of reforms adopted by the IMF board of governors at its annual meetings in Singapore.
