The Brettoon Woods twins, namely the International Monetary Fund and the World Bank, moved to Washington almost at birth. Now in their 60s, the twins are facing the prospects of unemployment in a financial world dominated by private capital flows. This is probably more true of the International Monetary Fund than its twin.
To recall some history, in the initial 25 years of its existence, the IMF had a major role in the international monetary system. It was the era of fixed exchange rates, which individual countries could not alter without the agreement of the IMF. It was also engaged in offering balance-of-payments assistance to countries having difficulties.
Its power and role in the exchange market started getting eroded in the 1970s as the fixed exchange rate system collapsed.
More and more countries declared their currencies to be fully convertible and exchange markets became the determinants of exchange rates amongst the major currencies. The commoditisation of money meant a corresponding reduction in IMF's role in relation to exchange rates.
In a way, the 1970s was a period of transition for the IMF, even as the sharp rise in the price of oil threatened international financial stability. The subsequent quarter century, beginning in 1980, witnessed the busiest period in IMF's history, in its role as the lender of last resort.
In the 1980s, country after developing country, experienced balance of payments crises, partly because of the high price of oil, but more so because of the sky-high level of dollar interest rate: these led to debt servicing problems for many countries in Latin America and Africa. It took a decade for the mess to be sorted out and for the external debt of these countries to be restructured. Brady bonds were a legacy of the debt restructuring.
Named after the then US treasury secretary, these long-term bonds, secured as to the principal amount by US treasuries, were offered to many creditors in return for extinguishing debt. The last of the Brady bonds have recently been retired, or purchased back by the issuer countries, thus ending one chapter in international monetary history.
In the 1990s and in the first couple of years of the present century, the IMF remained busy with managing balance of payment crises in different countries - India, Mexico, Argentina (how many times?), Brazil, south-east and east Asian countries, and others. In recent months, however, both Argentina and Brazil have prepaid their outstanding borrowings from the IMF, and the only major borrower left on its books now is Turkey, another perennial client. The loan book has shrunk from $55 billion a couple of years ago to $15 billion now.
Various proposals for reform of the IMF are currently being debated:
- The fund's quotas and voting rights, fixed in the 1940s, do not properly reflect today's world;
- Should surveillance of economic policies of member countries, rather than lending, become the core task of IMF?
- Should the IMF become an asset management company? Lawrence Summers, the former U.S. treasury secretary, recently proposed the creation of a $500-billion fund to be contributed principally by Asian countries, and managed by the IMF, for investment in commercially viable projects.
- Should its decision-making powers, currently exercised by a board of executive directors, each nominated by an individual or a group of member countries, be delegated to internal management? (Structural adjustment for the IMF itself?)
The IMF's twin, namely the World Bank, is also finding itself with a diminishing role, in a world where private capital flows are far larger than what resources the World Bank can lend to developing countries. Take our own case - at one time, the World Bank was the single most important external resource provider for us.
Now, direct and portfolio investments are far bigger than World Bank funding. Paul Wolfowitz, the current president, is one of the so-called neo-conservatives in the US. Before his current appointment, he was best known for being the strongest advocate of the invasion of Iraq, a regime change and for thrusting democracy down the throats of the hapless Iraqis.
His qualifications as a development economist were, and remain, well hidden. Lately, Wolfowitz has taken up another crusade - fighting corruption - with as much fervour as his advocacy of regime change in Iraq.
Several countries such as Congo, Bangladesh, Argentina, Kenya, Chad and indeed India have had bank loans or debt relief suspended because of corruption or non-transparency in the utilisation of bank funds. Battling corruption is a far more honourable objective than Wolfowitz' earlier agenda - how far he will succeed is, of course, anybody's guess.
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