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ECONOMY: What Role Can the IMF Play Today?

Mario Osava

RIO DE JANEIRO, Oct 13 2008 (IPS) - Having failed, to date, to play an active role in the current global financial crisis, the International Monetary Fund (IMF) may become a symbol of the end of an era and the need for a different system, more suitable to today’s new world order.

But the crisis does not spell out the demise of the IMF; instead it offers it "an opportunity" to reassert itself and overcome the lack of a "mission" that it has been suffering for some time now, said Eduardo Viola, a professor at the University of Brasilia’s International Affairs Institute.

In view of the evident "need for global governance" in the financial arena, the IMF could gain "monitoring and regulatory" authority over even the world’s great powers; but that would only come in the future, and after much negotiation, Viola told IPS.

A "lean and restructured" IMF could have a role to play in the coming new "era of regulation," as a body that "would standardise the rules of an effective globalisation process, preventing a situation like today’s, where everyone does whatever they want," Carlos Thadeu de Freitas, a former director of Brazil’s Central Bank, concurred.

The financial system, as it currently stands internationally and in many countries, "is coming to an end," and it will be necessary to find "national solutions," to later "reinvent a new global format, building on whatever survives from the old one," Ricardo Carneiro, who teaches economics at Campinas University, told IPS.

The IMF – which together with its sister institution, the World Bank, held their joint annual meetings Oct. 10-13 – lost its capacity to have a bearing on a major crisis like the current one, and lacks resources to help large nations; it can "only assist countries of the periphery," said Carneiro.

In 1998, in a major operation to assist Brazil, the IMF contributed 41.5 billion dollars, 18 billion of which were from its own coffers and the rest of which came from international development banks and wealthy nations, such as the United States, Japan and several European countries.

Today, Brazil has more than 200 billion dollars in foreign reserves, an amount that exceeds the funds that the IMF has available to come to the aid of financially distressed nations. It now takes trillions of dollars to bail out national financial systems, and the full extent of the crisis is still unknown.

There is a growing consensus among analysts that the new tendency will be towards heavy regulation, but complex negotiations will be necessary to establish such regulations. "First we will have to put out fires and prevent crashes, before we can even begin to discuss a new international system," Freitas told IPS.

For now, the way to reach a solution appears to be for the central banks and financial authorities of the large economies to act together, in coordination, say the analysts.

"But there is great uncertainty; we still don’t know if the way forward will be based on cooperation or conflict," said Viola. "If it is through conflict, we could be facing a dangerous scenario like in the 1930s, which could, for example, revive U.S. isolationism," he predicted.

In any case, the crisis hastens a global rearrangement at least in economic terms, and it will affect the international scene more than the 9/11 terrorist attacks in the U.S., prompting changes similar to those seen in 1989, at the end of the Cold War, said Viola, a sociologist with a PhD in international economics.

A G8 of the most powerful nations (Britain, Canada, France, Germany, Italy, Japan, Russia and the United States) that excludes a China that is much more powerful than several of the group’s members, is no longer viable, he argued.

China’s participation in the process of global restructuring is just as "decisive" as that of the U.S., Britain, the euro zone countries, and Japan, he maintained.

He added that "second tier" countries, such as Brazil, India, Russia, Canada, Mexico and South Korea, should also have a voice in the coordination efforts.

The G8 may hold an emergency meeting soon, and Russia has asked for several emerging economies to be included.

In Viola’s opinion, "no national solution to this crisis is possible," as "national monetary policies only make it worse." A reform of the international financial system would require greater cooperation and regulation, which in turn entails "relinquishing a bit of national sovereignty."

This would include, for example, setting rules for exchange rate policies that could limit controls such as those applied by China, which maintains a heavily devaluated yuan, thus favouring exports. Would Beijing accept this? "It may, because China is also interested in avoiding a crisis like the current one," Freitas said.

While attempts are being made to overcome the acute phase of the meltdown – marked by panic and lack of confidence – through still informal attempts to coordinate Central Bank actions, economists have taken centre stage, but a new leadership will be needed to get globalisation back on track, said Viola.

As a result of the crisis, current leaders, both economists and politicians, are suffering an "erosion of their authority," he said. "Recent heroes, like Alan Greenspan (former chairman of the Federal Reserve), are now being blamed for the disaster," the professor added.

The immediate future calls for "a new generation of politicians" that is not contaminated by mistakes of the past, and the democratic presidential hopeful, Barack Obama, may be the first of that generation, as the next "young, open-minded" president of the United States, "inspiring confidence among young people," he concluded.