As Asian discontent grows, will it take a world war to reform the IMF?

Great reforms seem to be born only out of major upheavals. And the IMF enjoys only as much power as its fractious owners are prepared to give it

Anthony Rowley

Published: 4:30pm, 22 Jun 2024

Why you can trust SCMP

Is it time to give up the pretence of a globalised world and of multilateral cooperation？ Should we resign ourselves to the prospect of living in an autarkic world of nations that are fated to become increasingly competitive, defensive and protectionist – possibly to the point of a world war?

Some leading powers are stumbling onto this road and some are aligning with the US or China while others are buffeted in a sea of non-alignment. It is tempting to view multilateral institutions like the IMF as neutral anchors in the coming storm but this is an illusion as things stand.

The Bretton Woods institution, founded in a golden age of international cooperation in 1944, could be destined to simply “fade away”, said former chief economist Raghuram Rajan in the June special issue of the IMF’s Finance & Development publication.

Or as former Bank of England governor Sir Mervyn King wrote in his book, The End of Alchemy: “The world of Bretton Woods passed away a long while ago, and with it the effectiveness of the post-war institutions that defined it – the International Monetary Fund, the World Bank and the Organisation for Economic Cooperation and Development (OECD).”

For Asia, one consolation, albeit scant, is that the region is likely to, as King wrote, “develop its own informal arrangements that will, in essence, create an Asian IMF, an idea that was floated in 1997 at the IMF annual meetings in Hong Kong and killed off by the United States”.

A great debate has been set in motion on the future of the IMF, which has 190 members. It was launched at the spring meeting of IMF finance ministers and central bank governors who asked the fund to come up with reforms by June next year.

IMF managing director Kristalina Georgieva addresses a press conference after attending a Eurogroup finance ministers meeting in Luxembourg City, Luxembourg, on June 20. Photo: EPA-EFE

Earlier this week, the IMF’s Independent Evaluation Office published a report, “The Evolving Application of the IMF’s Mandate”, challenging the “comprehensiveness, inclusive decision-making, transparency and even-handedness” of the IMF when operating in certain policy areas.

In theory at least, the outcome of the debate could prove epoch-making if it affords emerging nations such as China, India and others the “quotas” (which determine members’ contribution to the fund) and voting power to exercise more influence within the IMF and end the veto power of the US.

Fundamental governance and quota reforms are needed within the IMF, as Rajan (a former Reserve Bank of India governor and now a University of Chicago economics professor) put it. But whether a world divided politically, polarised economically and literally at war in places can agree on such far-reaching reforms is, to put it politely, moot.

Like any multilateral body, the IMF enjoys only as much power as its (fractious) owners are prepared to give it. It sometimes seems that great reforms follow only on the heels of great wars, and that has been the case for a long time, not least after the second world war. Nations, systems and cultures clash and from the battered and exhausted remains emerges renewed idealism – for a while.

Can such reforming zeal be created now in the absence of a catalytic or cathartic conflict? Perhaps the most we can hope for is that, as with the World Trade Organization, which has in effect lost its global mandate, the IMF will cede place to regional monetary arrangements.

Argentine Economy Minister Sergio Massa and Chinese ambassador Zou Xiaoli shaking hands after agreeing to activate the currency swap between both countries in Buenos Aires on April 26, 2023. Under the swap, Argentina pays for imports from China in yuan, rather than in US dollars. Photo: Handout by Argentina’s Economy Ministry / AFP

Would we be that worse off without it? The IMF has after all had its share of policy mistakes, such as those made during the 1997 Asian financial crisis when Washington-based economists mistook the fundamental nature of the crisis and the IMF imposed faulty solutions.

But that’s not the point. The world is in a mess that only a supranational body can rescue us from. Geopolitical tensions threaten to reach earthquake proportions, climate change threatens global catastrophe, a new global financial crisis looms as debt mounts, migration seethes, pandemics have reared their ugly head and populations are ageing fast.

22:10

Ageing and fertility: why Asian women are freezing their eggs

We will in all probability need some form of world government to deal with such mega crises and we will need it in a hurry. Yet there is no such entity in sight on the political front and the next best place to look is at the multilateral institutions – not least the IMF.

As Rajan put it, the IMF should be able to “offer an independent voice on national policies – especially those that threaten the country’s macroeconomic stability – and serve as lender of last resort for countries that lose the trust of the markets”.

It should also be able to steer countries towards policies that support the fair exchange of goods, services and capital and complement the WTO. Above all, it should be able to offer an independent voice on national policies. Yet, as Rajan puts it, the IMF’s “anachronistic structure leaves it ill-positioned to carry out all of these functions”.

This structure, argues Rajan, has no basis in logic or in the economic size of IMF member countries, reflecting instead “the Western alliance’s desire to hold on to power”. If, he added, IMF members do reform quotas and governance simultaneously, an independent IMF could bring a fragmenting world together on key issues.

From my experience as a journalist in covering IMF affairs for more than 40 years, I would say “Amen” to that but I would also expect true reform to follow only in the wake of further crises whose nature could prove to be dramatic and traumatic.

Anthony Rowley is a veteran journalist specialising in Asian economic and financial affairs