Last April, all but two of the largest and richest nations of the world agreed to contribute an additional $400bn to the IMF to enhance its ability to lend to nations facing financial crises. Other than some EU and Canadian officials, most politicians and policy makers have been fairly silent about the fact that Canada and the U.S. are the only holdouts among the industrialized countries that were asked by the IMF to raise their contributions to the firewall it is building to stem the likelihood of future financial crises.
Since the increase in the IMF’s financial arsenal is set to become official at the Los Cabos summit, where expectations of meaningful progress towards resolving the mounting economic problems the world faces have been lowered by the day, it seems appropriate to consider whether Canada’s stance is the correct one. Besides the one-liners, likely to make the evening news, about not wanting to ‘pass the plate’ there are better reasons to agree with the Canadian government’s position.
It seems almost incredible, almost five years since the crisis began in the U.S., and a little over two years since financial turmoil spilled into the euro zone, that governance issues at the IMF have yet to be addressed in a meaningful fashion.
Bank of Canada researchers—Santor (2006), Maier (2007), and Maier and Santos (2008)—for example, warned some time ago that IMF decision-making needed to better reflect the shift in the global economy towards recognition of the rising influence of emerging markets (in particular, in favour of the BRICs). Moreover, compared to recent changes in corporate governance, prompted by earlier private sector scandals (e.g., Enron in the U.S.), the IMF decision-making structure lacked the necessary checks and balances as well insufficient accountability and transparency vis-à-vis its membership.
Finally, if central banks in the industrialized world, as well as in many emerging market economies, have been complimented for applying best practices when it comes to explaining and delivering what constitutes good monetary policy, the IMF appears to lag far behind. One of the most important functions of the IMF is surveillance. Yet, it has only belatedly adopted new strategies to provide early warning of crises to come and improve the value and usefulness of its economic assessments. It did not help matters that, just as the global financial crisis erupted, the jewel in the Bretton Woods post-World War II crown of new international institutions was rapidly shrinking in size and relevance on the global stage.
Under these circumstances, it is not surprising that the BRICs, while signaling a willingness to help build the IMF’s financial firepower, have, so far,5 withheld their promised additional contributions. Reflecting the excessive dominance of European states in that institution, those leading the IMF seem to have learned precisely all the wrong lessons about the sequencing of necessary reforms as vividly demonstrated by their European cousins almost on a daily basis. Today we are witnessing the common currency under severe stress as one attempt after another to stem contagion from Greece, Italy and Spain, fails to convince markets. Meanwhile the public is becoming increasingly exasperated as politicians in Europe succeed in turning back the clock on a half century of economic and political integration.
Back in the 1990s, again in Europe, when the former satellite countries of the Soviet Union faced the problem of transitioning from a centrally planned economy to a market driven economy, economists and policy makers asked whether the resulting transformation needed to be sequenced in a particular manner. The answer, unsurprisingly, was yes. Once private property rights were created and a proper legal system was in place, the manner in which state banks and other state-controlled firms were privatized mattered considerably. Only then could monetary and fiscal policies actually work as in the industrialized world. Two decades later the lessons from those difficult days are largely forgotten as austerity, for its own sake, is placed ahead of a menu of policies that will ensure a more coherent European Union and the survival of the common currency.
It seems almost obvious now that, if a new version of Bretton Woods had to be created when the global financial crisis erupted in 2007, one of the missed opportunities to signal the importance of international cooperation was a complete overhaul of IMF governance. Instead, the same old institution, with its insistence on imposing inappropriate economic policies in countries in need, goes around the globe begging for additional funds in an end-run attempt to become a global lender of last resort.
There is little doubt the world needs a global lender of last resort. However, why the international community would want to support the current structure of the IMF is a mystery. To expect all the major economies to provide large sums of money to an institution, whose structure is from a past era, in the hopes of forestalling future economic crises is to invite more trouble. There is a reluctance it seems to recognize that the world has changed dramatically over the last two decades while the IMF has consistently given bad economic advice or has belatedly recognized the success or appeal of certain monetary policy strategies like inflation targeting. The tables have truly turned with many emerging and less developed economies demonstrating not only economic resilience, while much of the industrial world wallows in low growth, but they have also created the kinds of institutions and governance rules wealthy countries insisted were essential for economic success.
Finally, a crisis is not the time to create new opportunities for Europe—with its half-backed responses to the defects of monetary union—to receive additional financial support. The point is not that Europe is less deserving of financial support than other potential borrowers. Under the right conditions, this could prove beneficial. Instead, the international community must create an institution that will build trust and is able to provide the necessary support while offering the correct advice to help the world extricate itself from its present economic gloom. This requires a renewed commitment to policy cooperation, also sorely lacking, again because the IMF simply does not have the capacity or influence to encourage this kind of behaviour.
Under the circumstances, Canada’s best response is just to say no… for now.