March 27, 2009 Mandate for Reform

The IMF has long lacked resources and a role. It should assist countries in financial turmoil, but there must be greater representation by emerging economies

The International Monetary Fund was born in a spirit of postwar idealism in 1945. Its principal architects, notably J.M. Keynes, envisaged that it would advance international economic co-operation. They were determined that there should be no repetition of the destructive economic nationalism that had worsened the Great Depression in the 1930s.

But the IMF has never won the admiration that this laudable intention might have inspired. Unwieldy, underresourced and assailed by diverse critics, it has played little part in recent efforts to rescue the global economy from financial crisis and deep recession. Gordon Brown has called for a new Bretton Woods for the globalised financial system - an allusion to the 1944 Bretton Woods conference that established the IMF and laid the foundations for the postwar economic order. That aim is easier to declare than to realise. But the IMF no longer has the role for which it was created. It might have another and fruitful one. The G20 summit is the right place to make plans for it.

The intention of postwar planners was that international exchange rates should be fixed. This would avoid the competitive devaluations that had sparked economic warfare in the 1930s. The IMF would use contributions from member countries to extend short-term loans to governments to deal with balance-of-payments problems. The IMF managed the international monetary system by approving exchange-rate adjustments. This arrangement worked well for three decades. But it faltered as the US pursued inflationary policies. Investors lost confidence in the value of the dollar - the mainstay of the international financial order. The system of fixed exchange rates gave way to floating rates.

The role of the IMF since the collapse of the Bretton Woods system has lain in economic monitoring. It also has extended medium-term loans to countries with financial problems. Famously, the Labour Government in Britain in 1976 applied for an IMF loan in order to forestall a sterling crisis.

In the 1980s, the IMF made loans to countries while requiring changes in economic policy under so-called structural adjustment programmes. The conditions attached to loans were often austere. The role of the IMF as it was first envisaged was that of the lifeguard, helping countries in economic squalls. More recently, it has been that of the policeman - and has provoked strong political criticism.

The IMF has suddenly become more prominent owing to today’s crisis. It gave bad advice and imposed excessively harsh conditions on countries caught up in the Asian currency crisis of 1998. The financial maelstrom that has engulfed Iceland, Hungary and others gives an obvious role to the IMF in extending loans in the traditional way. But the IMF cannot strictly act as a lender of last resort, because - unlike a central bank - it is unable to create money. It relies on resources from its member states.

Reforms that should be agreed at the G20 summit are a doubling of the IMF’s resources to at least $500 billion and a change in voting weights to reflect the greater importance of emerging economies, such as China, Brazil and India. The "quotas" allocated to each country determine the voting weights and the size of financial contributions. It would enhance global economic stability if countries awash with savings put those funds to use. Wang Qishan, the Chinese Vice-Premier, indicates in The Times today support for greater IMF resources in return for change in the quota system. Smaller countries need help in adjusting to a harsh climate. The future of the global economy is in the hands of countries that should have a stronger role in the IMF.