The route to democracy at the IMF

The route to democracy at the IMF

Kenneth Rogoff, Project Syndicate

Emerging market countries from Chile to China have been
arguing for some time that the International Monetary Fund -- the
nerve center of the international financial system -- needs to
become more "democratic." They want more policy influence the
next time the Fund decides to bail out a fellow emerging-market
country like Argentina, Brazil, Indonesia, and Turkey.
(Unfortunately, benign as current market conditions may seem,
there will surely be a next time for some countries.) In the
meantime, as a new "Washington Consensus" of best-practice
economic policies inevitably emerges, developing countries want
to feel that they helped design it, for better or worse.

I couldn't agree more. The IMF's perceived "democratic
deficit" is a serious challenge to the Fund's political
legitimacy and to its ability to effectively stabilize crisis
situations. But let's recognize that real democracy is only going
to come when middle-income developing countries are prepared to
back up their lofty rhetoric with hard cash.

Right now is precisely the time to do so, given that the
United States has become, without rival, the world's most
reckless borrower. The U.S. is draining a whopping 75 percent of
the world's surplus savings. Today, even formerly bankrupt
governments from Korea to Russia to Mexico are awash in dollars.
Why not put some of those dollars to good use?

These countries need to understand that calls to cut rich-
country voting shares at the IMF, unless they are backed up by
real money, are naove, if not downright hypocritical. At the end
of the day, as long as the IMF is in the lending business, it
needs to keep its creditors happy. Otherwise, they will pull up
stakes, and the Fund (and its sister organization, the World
Bank) will have a debt crisis of its own. Right now, the U.S.,
Europe, and Japan put up the lion's share of the capital, so they
have disproportionate power.

It doesn't have to be this way. Many middle-income countries'
central banks are hoarding dollars today in order to prevent
their currencies from appreciating too much against the sinking
dollar. China alone, with over $600 billion in reserves, holds
more than enough dollars to recapitalize the IMF four times over.
Even Latin American governments now hold enough dollar reserve
assets to buy out Europe's shares in the Fund.

It may seem strange to make middle-income countries pay for
their own bailout insurance, but it isn't. They have much more at
stake in IMF policies than do rich countries.

Many people have forgotten that the Fund was originally
conceived as a cooperative -- it bailed out England only a few
decades ago, and almost had to bail out France. People forget
these episodes because the Fund's resources have not kept pace
with the explosion of global capital markets so that today, the
IMF lacks the capacity to bail out an Italy or a Japan (though
the issue may well arise one day.) So, if the Fund is to resume
its identity as a cooperative, it makes sense to shift its center
of gravity.

Would middle-income developing countries actually change
things if they were big creditors at the Fund? I wonder.
Admittedly, no developing country ever seems to vote against a
big bailout for one of its brethren, no matter how ill conceived.
But would such indiscriminate largesse persist if middle-income
countries knew that their votes really counted, and that they
were spending their own money? I doubt it.

On the whole, I expect that the bailout policies of a more
"democratic" IMF would look much as they do now. After all, the
laws of economics are always going to force prodigal debtor
countries into adopting austerity measures. If a country that has
been borrowing like a drunk suddenly sees its credit dry up, it
will tighten its belt -- raise taxes, cut spending, or do both --
with or without an international lender of last resort. Perhaps
the IMF's bedside manners would improve, perhaps not.

In any case, greater political legitimacy would likely make
the Fund's crisis leadership smoother and more credible,
potentially shortening crises and minimizing their pain.

The big question is whether the rich countries that have long
ruled the roost at the Fund would actually surrender some of
their power. They might, and they should, even if global
financial markets take time to adjust to a slightly smaller role
for the dollar. They really have little to lose and much to gain.

So there is an upside to today's massive U.S. fiscal and
current account deficits. The structure of global imbalances,
with the U.S. the big borrower and emerging markets the
creditors, presents a rare opportunity to finance a change in
governance at the IMF. Let's do it now before the chance slips
away when the next round of crises hits.

The writer, a former chief economist of the IMF, is Professor
of Economics and Public Policy at Harvard University.