In these tumultuous economic times, we have learned that no organization or firm is immune from extinction when confidence in it plummets. While organizations and firms tighten their belts, they are also forced to take a look at what they have done right and wrong and position themselves to both weather the storm, and prepare for when the storm subsides. For the International Monetary Fund (IMF), the time has come for it to pay attention to the past grievances of borrowers and to improve its reputation and legitimacy so it can play a more effective role in the future.
At the 2009 London summit, the G20 allotted $1 trillion to the IMF. As the international financial institution dubbed the lender of last resort, the IMF's role is to help ease the burden of economic and financial adjustment that many emerging market economies and developing countries will endure in the near future. This is a role all too familiar to the IMF. Throughout the 1980s and 1990s, the IMF has responded to the call of duty with financial support and economic advice to its client states. But the IMF's lack of attention or understanding of the internal politics of its members resulted in many of these former IMF borrowers vowing to never willingly return to the IMF. Many of the IMF's past borrowers are angry at the years of austere or misguided advice they received from the fund. They turned to the once-ascending capital markets to raise their needed funds, created self-insurance policies through building their reserves and attempted to create parallel regional monetary organizations.
The fund's management team and large financial benefactors had spent a number of years talking about how to make the IMF a more attractive institution to its would-be clients. Some of these ideas included reallocating IMF quotas and votes, adding IMF executive board chairs, recruiting a non-European managing director, and expanding IMF surveillance.
Ultimately, the IMF's executive board tweaked the IMF's governance structure to give more weight to China, Turkey, South Korea, and Mexico, and promised future tinkering in voting to give the poorest countries added, yet still inaudible, voice. For many in the concerned policy community, think-tanks, and academia working on ideas for IMF reforms, the buzz made people feverish about the possibilities for change at the fund. In the end, the proposed changes were minor and member states' disappointments in fund reforms were significant.
Today, the IMF should not take its new trillion-dollar injection as a sign of renewed faith in the organization, but as an opportunity to improve on its reputation and to renew its intellectual capacity for the future health of the global economy. The IMF has still not addressed the fact that it had burned many bridges over the past 20 years. The fund's legitimacy crisis remains and needs to be addressed with a look at why borrowers lost faith in the organization. These former borrowing states are looking for a greater say in IMF decision-making; they are also searching for a stronger IMF staff appreciation of local constraints in implementing stringent economic policy prescriptions tied to loans.
Next, the IMF needs to strengthen the capacity of the IMF staff to scrutinize the policies of industrialized countries. After all, this international economic crisis did not start in the developing world and we have been sorely reminded of how interconnected the global economy is. The IMF staff's inability to give candid advice about the industrialized countries' loose financial regulations and soaring deficits had stemmed in part from an imbalance in IMF governance that favoured the G7, and pointedly the United States and the European countries. To make the IMF truly effective as a ruthless truth teller, it should not be self-censoring in fear of biting the hand that feeds it. Here is where a more equitable distribution of decision-making power in the organization could help lead to changes in staff capacity to give better world economic analyzes. This could also give emerging market economies more of a stake in the organization and thereby move us a bit farther away from the dynamics that lead to states amassing reserves and from the dreaded product of global imbalances.
Today's bailouts and financial injections should be put to good use and we should ensure that things do not remain business as usual. The IMF needs to acknowledge past mistakes, make amends with past borrowers, and repair its legitimacy and reputation. Then this international financial institution needs to sharpen its intellectual tools by enhancing its staff's capacity to watch for future fault lines in the world economy, wherever they may lie.
Bessma Momani is senior fellow at the Centre for International Governance Innovation in Waterloo and assistant professor at the University of Waterloo.