International Herald Tribune
Bowring: Shortchanging the IMF
Thursday, January 15, 2009

HONG KONG: A trillion or two trillion dollars here, a few hundred billion there, the stimulus numbers coming out of the United States, Europe, China and (maybe) Japan have the capacity to shock and awe, or to be too big to be meaningful.

All of these countries are in a position to print more money without having to worry much about the short-term consequences of sky's-the-limit bailouts and pump-priming.

But the one truly shocking figure for those concerned about the global dimensions of the crisis is that the International Monetary Fund is having to plead for a paltry $150 billion.

The IMF's managing director, Dominique Strauss-Kahn, recently said that this amount would probably be needed to help counter the impact of the worsening global outlook on emerging markets and poorer countries. He was right to be chiding the developed world and the major holders of very large foreign reserves, all advocates of globalization, for failing to take a global view of the crisis.

That the head of what is supposed to be the international lender of last resort has to beg for what is, by current standards, such a tiny amount sums up just how broken the international system has become. Unless some mammoth efforts are made very soon to fill the void being left by the sudden collapse of exports, particularly of commodities, which have plunged in price, much of the developing world will soon find itself having to cut spending rather than stimulate demand, thereby deepening global recession and adding to the miseries of the global financial sector.

An additional consequence, especially damaging for the West in general and the IMF in particular, is that the Asian drift toward setting up a regional alternative to the IMF will be given a big boost. As much for political as economic reasons, China, Japan, Taiwan and Singapore - which all have huge foreign-exchange surpluses, will focus on ways of lending to Asia's deficit countries rather than helping emerging markets as a whole through the global institutions.

The IMF's $150 billion is paltry by any standard. It is just 8 percent of China's reserves and 4 percent of the combined reserves of the six other leading East Asian economies. It is also puny when measured against the needs of countries with open foreign-exchange markets needing safeguards against sudden, possibly irrational, outflows.

Even South Korea recently found that $200 billion in reserves was barely enough to stem a crisis. The problems looming for those many developing countries with modest reserves and rapidly deteriorating trade balances are alarming. The collapse in prices for commodity producers will help most of the developed world and China, which do not need help because their currencies are accepted as reserves, or, in China's case, because its reserves are so large.

Clearly the IMF really needs a lot more than an additional $150 billion, or some new or revived mechanisms for providing both liquidity support to emerging markets and ensuring a flow of longer-term capital at a time when lending by the banking systems of most advanced countries is constrained by their need to rebuild capital destroyed by the U.S. meltdown.

One such mechanism could be a revival of issuance of Special Drawing Rights, a device created in the late 1960s to supplement global reserves and by extension act to increase capital flows to developing countries. After years of rapid liquidity growth caused by U.S. deficits there may not seem need for yet more.

But those global foreign-exchange reserves are very unevenly distributed, and, with the U.S. current account deficit likely to plunge and neither the Euro area nor Japan likely to go into significant external deficit, new money is needed internationally.

Another route could be for the IMF to act as an intermediary in enabling developing countries with sound fiscal records to sell local currency bond funds to central banks or even pension funds and private investors in countries with big surpluses. The Asian Development bank has already started doing this in a minor way with its listed Asian Bond Index Fund.

Indeed, Asia may already be quietly quite advanced in regional cooperation, ignoring the IMF. In addition to the Asian Development Bank, and the activities and numerous currency swap arrangements between Asian central banks, there is evidence that Asian institutions have been active in supporting dollar bond issues by countries in the region, like the Philippines, at a time when emerging markets instruments generally have been shunned.

Such regional cooperation is in many ways admirable. But unless matched by efforts elsewhere, it could lead to a divide that strengthens existing tendencies towards regional trading blocs. That would be to no one's long-term benefit. But it will happen if Western countries continue to fail to grasp the global ramifications of what is occurring to their own economies - and to fail to recognize that they still hold most of the keys to the international financial and trading system.