The IMF is in the news and, like other types of firefighters and crisis managers, the reason is not entirely reassuring. People are getting increasingly worried that the currency collapses in Turkey and Argentina might be the start of broader emerging market troubles. In an FT interview, Christine Lagarde, the IMF managing director, herself has warned that an escalation of the trade war between the US and China, now seemingly under way, could give a new shock to emerging markets.
The IMF is in the news and, like other types of firefighters and crisis managers, the reason is not entirely reassuring. People are getting increasingly worried that the currency collapses in Turkey and Argentina might be the start of broader emerging market troubles. In an FT interview, Christine Lagarde, the IMF managing director, herself has warned that an escalation of the trade war between the US and China, now seemingly under way, could give a new shock to emerging markets.
The obvious short-term question for the jittery investor, as Gillian Tett sets out in her latest column, is whether the fund has the ammunition to address capital flight on a bigger scale. The longer-term question is how well placed the IMF is to fulfil its traditional role of stabilising balance-of-payment disruptions and capital flight in a global financial market that continues to undergo profound changes.
As if on cue, a quartet of world-class economists have published their analysis of the fund’s present state and future prospects, in the form of the latest Geneva Report. The title, “IMF Reform: The Unfinished Agenda”, rather undersells the breadth of the report, which includes a solid history of what has changed over the past two decades in financial markets, in governance arrangements for them and at the IMF itself. And there is, of course, the important fact of what has not changed: “Crises have not gone away . . . Twenty-first century crises remain centred on the capital account of the balance of payments and international capital flows.”
Among the things that have changed, of particular interest is the report’s discussion of two developments. One is the rise of China. The other is the growth of regional arrangements for balance-of-payment crisis management. These come on top of national self-insurance in the form of reserve accumulation by several countries, and include bilateral and plurilateral central bank swap line facilities (Adam Tooze has explained in his new book how these affect the international political economy) as well as the sovereign rescue funds set up in the eurozone.
The two developments are of course related: China has used swap lines as a means to boost the role of its currency and thus as a tool in its strategy to internationalise the renminbi.
These developments, in my view, could be fatal to the IMF’s traditional role as the pre-eminent crisis manager. That role is already under heavy pressure, as the build-up of alternatives testify. And of course the IMF’s reputation as a competent crisis manager has taken a deserved battering, both for its participation in the “rescue” of Greece, and for its poor forecasts in the global recovery.
Add in the presence of alternative remedies for balance-of-payments crises — and a Chinese economy with a heft that must surely be accommodated in IMF governance but which it seems impossible to do in ways that the US might find tolerable — and it is hard to see how the IMF can avoid relative marginalisation. It will always have a role, of course, but it is likely to be one crisis manager among many, and that itself will mean a qualitative change to its standing and influence.
What would prevent such a development? The Geneva Report identifies ways in which the IMF could partner better with regional balance-of-payments support mechanisms, as well as governance reforms. The latter focus on giving fund management more independence from the political representatives of member countries, which could be a step towards squaring the circle of giving China a greater role. (These proposals are in addition to other useful recommendations for how it could do a greater job on its own, by upgrading its tools and readiness to act.)
Such proposals are good as far as they go, but they might be necessary rather than sufficient for retaining IMF supremacy. That can perhaps only be ensured by much more radical reform, such as giving the IMF the power to issue real supra-sovereign currency. But that is not on the cards; even the far more modest proposals of the Geneva Report look politically difficult to realise. The IMF should do the best it can, but the future does not belong to it — or not to it alone.
