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WORLD: IMF Has Long Way to Go – Even After "Istanbul Decisions"

Marina Penderis

JOHANNESBURG, Oct 29 2009 (IPS) - The International Monetary Fund (IMF) may be performing better during the current economic crisis than during the Asian crisis of the late 1990s, but it still has "a long way to go".

This is the opinion of economist Mark Weisbrot, co-director of the Center for Economic and Policy Research (CEPR), based in Washington, DC in the U.S. The independent CEPR promotes democratic debate on economic and social issues through research and public education.

Speaking to IPS from Washington, Weisbrot argues that: "The IMF is definitely doing better than during the Asian crisis, but I think that is too low a base for comparison. Are they doing what they ought to do? They have a long way to go."

Weisbrot questions whether the IMF’s plans for reform – dubbed the "Istanbul decisions" after they were unveiled during the Bretton Woods institutions’ recent annual meetings in the Turkish capital – will have real benefit for developing countries.

The proposed reforms include assessing how to extend instruments like the flexible credit line – a no-strings-attached credit line available to countries that meet certain criteria – and determining whether such instruments could work as a form of insurance for countries that feel the need to stockpile reserves against speculative attacks.

The fund also proposed a review of its mandate, including macroeconomic and financial sector policies.

It further announced its intention to support the Group of 20 (G20) with their mutual assessment of policies and to endorse the shift in quota shares towards emerging markets and developing countries by at least five percent from over-represented to under-represented countries by Jan 2011.

"Even if (developing countries) get five percent, the rich countries will still have the majority vote," Weisbrot points out. "Europe has almost never gone against the U.S. (at the IMF), really. Between the U.S., Japan and Europe – with maybe one or two countries to go with them – they will still control everything about the institution."

Weisbrot regards the flexible credit line as possibly beneficial, but is sceptical about the way in which it is implemented.

"The flexible credit line is a very good idea," he explains. "It allows countries to alleviate a run on their currencies and banking sector, but so far it has only been extended to three governments with strong allegiance to the United States – Mexico, Columbia and Poland."

"They can’t be the only governments in the world that qualify. In fact, Mexico’s economy has shrunk by seven percent this year – one of the worst in Latin America — and their growth over the past 36 years has been dismal. By what criteria do you call that good governance?"

Weisbrot believes that IMF participation in the monitoring of policies is unlikely to significantly influence the decisions the G20 countries make: "The IMF can only influence developing countries. They can’t tell rich countries what to do."

Weisbrot’s cautionary comments are backed up by recent research findings of the CEPR.

In a discussion paper, co-authored by Weisbrot and released in September ahead of the IMF meeting in Istanbul, it is shown that the IMF subjected 31 of 41 of countries it currently has agreements with to pro-cyclical macroeconomic policies and that this is likely to have exacerbated economic slowdowns during the current global recession.

Pro-cyclical policies are ones that could magnify economic or financial fluctuations, for example policies that exacerbate the current economic slowdown rather than work against it.

Stephen Gelb, economist and executive director of The Edge Institute in Johannesburg, South Africa, says: "The Burkina Fasos (one of the countries listed in the CEPR paper) of the world don’t have the capacity of political negotiators in government to take an independent view from the Fund."

The Edge Institute is an independent organisation that does economic policy research to promote "growth, development and distributional equity" in South Africa.

Since the start of the economic crisis last year, the Fund has also extended funding to high and middle income countries, such as Iceland and Latvia. "Iceland and Latvia are in a different position. Is the fund promoting different policies in middle and high income countries?" asks Gelb.

However, Weisbrot describes the pro-cyclical policies linked to the IMF’s agreement with Latvia as being detrimental to that country’s economy too.

"The first agreement was late last year. Since then Latvia’s economy has shrunk by 18 percent for 2009. This is really rare in the modern world," says Weisbrot. "(The IMF loan) prevented the collapse of Lativia’s banking system, but squeezed the economy with a decline in output and pro-cyclical policies. It would have been better to let Latvia’s currency fall and let the banks take the losses."

Gelb questions whether current IMF employees have the necessary experience to make the changes needed to successfully address the economic slowdown.

"In the past, when a country ran out of foreign exchange reserves and went to (the IMF) to borrow, their approach has been to cut fiscal spending," he explains. "That is what they have done for almost 30 years, since the early 1980s. Now the situation is different.

"Countries still have a lack of foreign exchange reserves, but it is because exports have dried up as there is no growth in other parts of the world. The money given in April (to the IMF by the G20) was intended to stimulate growth. Who in the IMF was there at a time when they did this? No one – they have all retired or left. The question is, can they turn their ship around?"

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