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FINANCE: Not Reforms, But Reformed

Analysis by Sanjay Suri

LONDON, Oct 7 2009 (IPS) - The annual meetings of the International Monetary Fund and the World Bank have run into a predictable roadblock in setting out brave new directions: a roadblock called memory. What could have been an immensely sensible idea of turning the IMF into a new central bank for the world is up against years of mistrust the IMF has built for itself.

Its disastrous structural adjustment programmes are too recent for countries to be convinced that they can cut national reserves in order to spend more because there would now be this new global bank sitting on a trillion dollars or so, and that if they should need money, they could have it from here without the kind of conditions attached that the IMF has made itself notorious for.

In the 1990s, the IMF controversially forced East Asian countries towards the path of reduced social commitments and high interest rates as a condition for loans. But there is more to the misgivings than the cutting of programmes for the poor, and the IMF record during the Asian crisis.

As recently as last month at the G20 meeting of developed and emerging powers in the U.S. city of Pittsburgh, Pennsylvania, the IMF turned down demands from emerging economies for a seven percent shift in IMF quotas to their advantage. Instead, a five percent shift of quotas from over-represented to under-represented countries was agreed.

"It is a compromise figure because as of now the developing countries' quota is about 44 percent," Indian Prime Minister Manmohan Singh had pointed out in Pittsburgh. "The BRIC countries (Brazil, Russia, India and China) had suggested a rebalancing to the extent of seven percent, in which case the developing countries would have more than 50 percent. Seven is the demand, five is what was agreed, so obviously it is a compromise."

In developing countries, the IMF is seen as a supposedly global body where they still have to fight for their due place – and their overdue share. Not quite a circumstance that might encourage them to drop national reserves and leave it to any considerable extent to the IMF or to some new bank it may metamorphose into. The IMF remains accountable to shareholders first, not to countries in need. And this is a matter of fact here and now, not of memory.

It is against such resistance that IMF Managing Director Dominique Strauss-Kahn declared brave new ambitions for the IMF at the meetings of the IMF and the World Bank held in Istanbul Oct. 6 and 7. "This annual meeting may be the starting-point of a new IMF, and you may say later when you will be talking with your grandchildren that you were in Istanbul at this time," he told delegates.

But grandchildren may well remember the Istanbul meetings for divisions over the new dreams – if they have reason to remember them at all.

The policy steering committee asked the IMF to consider four areas for change – reviewing the IMF mandate, its financing role, multilateral surveillance, and governance. Of these, the one that's in the bag for sure is its new role of surveillance, to report on policies and trends as watchdog standing back. The business of doing rather than reporting is the more problematic issue.

Within the new mandate, the IMF has shown some success also in its financing role, with its new flexible credit line, offered so far to Mexico, Poland and Colombia, that Bank of Mexico Governor Guillermo Ortiz called the IMF's first "stigma free" lending. Mexico has a 47 billion dollar credit line with the IMF.

For the IMF this credit line is almost an advertisement, a foretaste of what a global IMF with a trillion dollars could do for the world. There would no more be those dreaded IMF reforms; this would be a reformed IMF.

But the doubts have not vanished as swiftly as Strauss-Kahn would like them to. Because the thrust of the argument is seen now with suspicion: the aim is to dissuade governments from holding on to large dollar reserves. The worrying flipside of the reserves is that much money is not now getting spent. The industrialised countries need the developing and emerging economies to do the buying as spending flattens out in the U.S. and across much of Western Europe.

Further, the recession-hit world of the developed countries needs new buyers abroad that it cannot find within. That could be helped immensely by a sharp drop in national currency reserves that the IMF now wants.

The opening of markets to goods from other countries is next on the agenda, when trade ministers meet to restart the stalled Doha round of trade talks in Geneva. The flight out from Istanbul to watch is the one headed for Geneva.

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