Tuesday, September 19, 2006

IMF reformasi

THE International Monetary Fund (IMF) has finally decided to give some of the poorer club members a bigger say.

The reform, which took place during the annual meeting of the IMF and World Bank in Singapore, has been billed as the biggest shake-up in the fund since it was set up in the aftermath of the Second World War.

The four beneficiaries are fast-growing China, South Korea, Mexico and Turkey. China's new share of quotas is 3.72 per cent (from 2.98), Mexico's is 1.45 per cent (from 1.21), South Korea's is 1.35 per cent (from 0.77), and Turkey's is 0.55 per cent (from 0.45).

Time to pop the champagne? Time to embrace the IMF again?

Not quite.

There is still a need for greater structural reforms within the IMF before it could truly be seen as an impartial global financial policeman.

First, tinkering with the voting power or quota has not changed the overall equation.

The United States, which will see its voting power ease by a marginal 0.3 percentage points to 17.1 per cent, continues to have the final say. This is because the charter allows for veto by countries with more than 15 per cent of the voting power. In other words, no major changes can take place within the IMF without Uncle Sam's nod.

Also, critics of the IMF have always pointed out that the Group of Seven industrialised countries has a voting bloc of 45 per cent. This reinforces the view that the fund acts predominantly in the interests of rich countries.

Second, the perception of IMF as the trojan horse of developed nations will continue to make poorer countries resist the IMF, especially after the Asian financial crisis nearly ten years ago.

True, the crisis was triggered by the Asian countries' flawed policies in some instances. There was no doubt many Asian countries had to reform their faulty economic and political systems then. But the foreign and mainly Western capital must also share the blame, and be regulated to help avoid sudden and overly destabilising effect on the real economies.

Instead, only the stricken economies were forced to swallow overly bitter medicine.

The IMF approach was flawed. It was a prescription that could have strangled even the fittest economies. To restore faith in battered currencies, one of the IMF suggestions was tight credit policies, which meant high interest rates at a time when many businesses were still reeling from the currency devaluation effect. High interest rates could have helped restore confidence in currencies in the short term but many companies collapsed.

Has anyone noticed how many foreign and mainly Western companies ended up as big buyers of distressed assets in IMF wards -- Indonesia, Thailand and South Korea -- at bargain prices during the crisis?

The IMF is now trying to rebrand itself, moving into the so-called "multilateral surveillance" -- essentially a platform to consult with multiple countries at the same time on problems that affect all of them.

One key agenda is addressing the global imbalances -- the big surpluses chalked up by Asian nations and the huge external deficit of the US.

Can IMF be truly impartial in coming up with proposals to help achieve a global equilibrium? Highly unlikely. This is because any proposal that does not quite favour the US will be shot down by the US.

And with such a checkered legacy during the Asian crisis, it is difficult to listen to the IMF preaching about reforms in countries, especially when it is unable to undertake big reforms itself.