Business

Saturday July 4, 2009

Can IMF be global banker?

THINK AGAIN BY ANDREW SHENG


FLYING to Boston for a conference on the global crisis, I went into the famous Harvard Coop bookstore in Cambridge. It was like my favourite candy store, I dashed here and there, picking up books I could not get in Asia and browsed new books that I could not see from Amazon.

Sitting in Harvard amongst the teachers of my teachers, I felt humbled by the collective brain power that gathered there. After all, the former Harvard president is now chief economic adviser to the US President and running the show to rescue the US economy.

There was one consensus – without the US economy recovering, it would be difficult to see a global recovery, but probably, the Chinese economy may be the first to recover.

Let me explain the role of the IMF (International Monetary Fund). Most people don’t understand the idea of the SDR (special drawing rights) and what the IMF does.

In Asia, the IMF is famously remembered for its role in trying to solve the Asian crisis, but many remembered the initials stood for I AM FIRED, because its recommended tough medicine initially created more deflation than easing the pain. Asian crisis countries could not print foreign exchange that they owed, whereas the West can print their own currencies and so ease the pain of crisis.

But so far, the IMF has not played a role in either providing finance nor advice to the large countries, such as the US, UK and European Union, where the banking losses are the most severe.

The IMF medicine will be given to the smaller members who unfortunately repeated the mistakes of Asia to borrow foreign currency more than they could afford.

We have to understand a bit of history to understand the IMF. The IMF and the World Bank were created in 1945 under the famous Bretton Woods Conference. There was a famous debate between the economic advisor to the US Treasury, Harry White and Lord John Maynard Keynes, the most famous economist of his generation, who wanted a global central bank and a global development fund.

In the end, the US Treasury view prevailed – the power of money creation was too important to give to a global agency; it was retained in the hands of the sovereign powers, of which the US was the dominant power after two World Wars.

The present Global Financial Structure was the direct result of Pax Americana, under which the US provided monetary stability and liquidity through the US dollar and a nuclear umbrella for global peace and security.

In exchange, countries opened up trade and investments, following the principles of free trade. Bretton Woods opened up free trade and broke the power of the British Empire to operate under a tariff barrier.

The post-war global development is the direct consequence of the Bretton Woods strategy, just as the present crisis demonstrated its inadequacies and flaws.

Can the IMF be a global central bank? The common definition of a national central bank is that it is an issuer of the national currency, responsible for monetary stability, systemic financial stability and domestic payment system and also financial adviser to the government. Based on this definition, the IMF is not an issuer of global currency, it has some role in global monetary stability, it failed to stop recent systemic financial instability and is not responsible for global payment systems.

It does surveillance work on global standards, provide advice to member countries and did give some useful warning on the recent crisis, but was ignored. So it is not the global central bank. Indeed, the IMF is not even the central bank of central banks. That is the role of the Bank for International Settlements, based in Basel, which is the secretariat for central bank discussions, the Financial Stability Forum (now Board), the Basle Committee for Banking Supervision, the International Association of Insurance Supervisors and other central bank committees.

Basically, the IMF has a balance sheet of about US$350bil (available resources of US$225bil) and a staff of 2,600, based mainly in Washington DC.

It is remarkable how the IMF almost had no lending to its members by 2007 and just laid off a lot of its experienced staff. By 2009, it was scrambling to give loans to several crisis economies and the G20 had just promised to increase its resources to US$1 trillion.

Is it enough? If you think that the IMF has just announced that Western banks probably lost US$4.2 trillion, and that global cross border banking is US$4.5 trillion, the new resources are helpful, but the task is huge.

Life cannot be easy for the deputy sheriff responsible for global financial stability, since he cannot influence the sheriff who hired him in the first place. The deputy gets blamed for the tough medicine applied to the smaller members, but he cannot apply the same medicine for the sheriff. It is not an equal world.

Don’t get me wrong. The IMF did not cause the financial crisis and can do a lot to ease the pain. It is an important provider of global public goods. But until its legitimacy and credibility is given to it by its dominant shareholders, it cannot be the global central bank, which is probably what the world really needs.

■ Think Asian - Datuk Seri Panglima Andrew Sheng is adjunct professor at Universiti Malaya, Kuala Lumpur, and Tsinghua University, Beijing. He has served as adviser and chief economist to Bank Negara, deputy chief executive of the Hong Kong Monetary Authority and chairman of the Hong Kong Securities and Futures Commission.

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