The International Monetary Fund gets a new boss today. Maybe now it can find a useful purpose.
Dominique Strauss-Kahn, a former French finance minister and presidential candidate, is taking over an aged institution with no clear raison d’etre. The IMF was originally created to help prevent a recurrence of the protectionist economic policies and competitive currency devaluations that exacerbated the Great Depression and helped spark World War II. The IMF was the “mechanic” in charge of the Bretton Woods system charged with making sure each nation’s currency stayed within the narrow range under a system of fixed exchange rates.
Unfortunately for the IMF, time passed it by. The system of fixed-exchange rates began to break down in the late 1960s and early 1970s. The United States loosened the dollar peg to gold in 1968 and discarded it completely in August 1971.
This left the IMF an institution without a cause. But instead of folding its tent, or at least reducing its activities, the bureaucracy dreamed up new missions to justify its continued existence.
The IMF reinvented itself to become crisis cashier and counselor to the world. Moving from crisis to crises — from the oil crisis of the 1970s to the more recent financial meltdowns in Asia and Latin America — the IMF steadily applied its newfound nostrum: ever more lending to developing nations, always dispensed with economic policy prescriptions.
Today, the IMF finds itself in a quandary. IMF recipients often resent IMF policy prescriptions and, given a choice, would rather not borrow from the Fund. With few economic crises in recent years, it can’t find any customers. Increasingly, countries with access to international capital markets try to tap them, rather than accept IMF assistance and the accompanying restrictions. Countries like Angola borrow from China rather than bow to IMF demands. Latin American finance ministries want to create a “Bank of the South” as a less strict competitor to the IMF when Latin countries face economic or balance-of- payments crises.
How bad is it? The Washington Post reports that, though “famous for its bailouts of troubled developing countries” a decade ago, the IMF now has “only $11 billion in credits outstanding; it is sitting on $252 billion in usable resources.” This is quite worrisome for the Fund because it makes its money from lending. Needless to say, its books have plenty of red ink these days.
The challenge facing Strauss-Kahn is to reshape his antiquated institution to serve a useful purpose in the rapidly changing global economic system. He has vowed reform, telling his Board of Governors, “it will be a hard task for all of us to rebuild both the relevance and legitimacy of this organization. But I am prepared to do that and I ask you to be prepared as well.”