Strauss-Kahn’s Drive to Recast IMF Faces ‘Legitimacy’ Hurdle
Dominique Strauss-Kahn is trying to keep the spotlight on the International Monetary Fund as the world’s focus shifts from the financial crisis to economic recovery.
With IMF members gathering in Istanbul this week, its managing director wants to turn the lender into an insurance fund that they can draw on in difficult times. That would expand its role beyond giving loans to distressed economies. His problem is that some of the 186 members aren’t ready to give power to an IMF they say is controlled too much by rich nations.
“It’s all very well for him to be arguing this is the role the fund should play,” Ngaire Woods, a professor of international political economy at Oxford University, said in an interview. “But the legitimacy problem the fund has to overcome to be a trusted reserve pool is massive.”
The financial crisis has seen the IMF rescue economies from Hungary to Ukraine and put it back on the front line of global policy making. As the world recovers, Strauss-Kahn, 60, says a central fund worth as much as $1 trillion would help prevent the global imbalances that led to the crisis. That’s because nations would feel less need to build up currency reserves during times of growth to protect themselves from future turmoil, he says.
If successful, Strauss-Kahn’s strategy may have the effect of slowing the purchases of dollar-denominated securities such as U.S. Treasury bonds that kept global interest rates low before the crisis.
Officials from emerging economies want assurances that a shift in voting power at the Washington-based IMF will continue in their favor. Germany has 5.9 percent of the votes at the IMF and China has just 3.7 percent even though China is now a bigger economy.
‘Legitimacy’
Mexican central bank Governor Guillermo Ortiz said in Istanbul on Oct. 5 he’s concerned “legitimacy” is “not likely to happen anytime soon.” His Brazilian counterpart Henrique Meirelles said a day earlier that “self-insurance works better.”
“The IMF is accountable to its shareholders and that’s going to be an issue” for Strauss-Kahn, Nobel Prize-winning economist Joseph Stiglitz said in an interview in Istanbul. “Some countries would like to return to business as usual as the crisis passes.” While Strauss-Kahn is doing a “fantastic” job, “it’s very hard to take charge of such a complex institution and navigate it through change.”
To succeed, Strauss-Kahn needs to win over countries that the IMF alienated in the late 1990s during the Asian crisis. Then, the lender forced governments from Indonesia to South Korea to cut spending, raise interest rates and sell state-owned companies in return for loans, attracting criticism that it prolonged the economic pain.
‘Long Memories’
While the IMF has retreated from attaching as many strings to loans, Thailand’s Finance Minister Korn Chatikavanij in May said seeking IMF help still carries a stigma in Asia. Asian countries have created their own reserve pool and no economy from the region has needed to turn to the lender in the current crisis.
“Asia governments do have long memories,” said Huw McKay, senior international economist at Westpac Banking Corp. in Sydney. “They remembered how they were treated in the Asian crisis and wouldn’t want to put themselves into that position again.”
Strauss-Kahn says the crisis shows it’s time both for the IMF to retool itself and Asian economies to break with the past.
“Given the costs associated with reserves accumulation, there is clearly a need for reliable emergency financing and hence for a global lender of last resort,” he said last week in Istanbul. “The fund has the potential to serve as an effective and reliable provider of such insurance.”
Strauss-Kahn’s Report
Strauss-Kahn is scheduled to flesh out his plan in a report to IMF officials next year.
Emerging nations are also winning more power at the fund. President Barack Obama and other Group of 20 leaders last month agreed to a transfer of at least 5 percentage points of so- called quotas from countries with disproportionate influence at the fund. Quotas determine voting shares and access to IMF loans.
Strauss-Kahn also already has an insurance system with the so-called flexible credit line that has attracted Mexico, Poland and Colombia. While reserved to economies it deems as sound, it comes with no strings attached.
Still, the IMF would require a “substantial increase” in resources for it to be global, according to Strauss-Kahn. While the IMF’s finances got a boost in April when G-20 leaders agreed to triple its resources to $750 billion, the additional $500 billion is not necessarily permanent.
‘Temporary’ Resources
Bundesbank President Axel Weber said yesterday there are “moral-hazard issues” arising from “the vast increase in fund resources,” which “should be viewed as a temporary measure.”
For Strauss-Kahn, the risk is that the IMF misses the chance presented by the crisis to take on a central role in preventing future crises, said Jim O’Neill, chief economist at Goldman Sachs Group Inc.
“The IMF has been given loads of opportunities here and needs to seize the moment,” O’Neill said. “I’m not convinced they will. Strauss-Kahn is doing a good job, but they should be bolder. They are still beholden to those who own them.”